Marketable Securities: Definition, Examples, Benefits, and Drawbacks
If you need a stable, short-term investment with a predictable return, marketable securities are a good choice. These financial instruments are fairly low-risk investments and can be quickly turned into cash. Given that where there is low risk, there is low yield, are they worth looking into? And how do they compare to non-marketable securities? That’s what we’re going to find out.
What Are Marketable Securities?
According to the marketable securities definition, these are liquid financial instruments that can be swiftly exchanged for cash on the open market. This makes them among the safer ways to invest money.
High liquidity means that there is a constant supply and demand, which, in turn, leads to low price fluctuation. One other thing that leads to price predictability is the short maturity period. Namely, these marketable assets have a mature period of up to a year.
Many companies use short-term marketable securities to generate a stable return that can easily be turned into cash. This is a much better solution than letting their idle cash lose value due to inflation.
Types of Marketable Securities
This type of security can be divided into two main categories:
- Marketable equity securities
Marketable equity securities are traded on stock exchanges and have quoted market prices. They include shares of common and preferred stock.
- Marketable debt securities
This type of security is traded in the bond market, and the most common examples of debt securities are US government and corporate bonds.
Marketable Securities Examples
The main characteristic of this type of security is its liquidity. It must also represent an interest as an owner or creditor, have a monetary value, and provide a monetary gain opportunity for the buyer.
Some of the most common examples of marketable securities are:
- Preferred shares
Other money market instruments like futures, options, and hedge fund investments are also marketable securities even though they are not liquid assets. That’s because they comply with the requirements mentioned above.
Learn more: Futures vs. options
What Are Non-Marketable Securities?
If we compare marketable vs non-marketable securities, a non-marketable security is an asset that the holder can’t trade on any significant market exchange, making it rather difficult to buy or sell.
Government regulations even prohibit reselling some types of these securities. They are usually traded through direct private transactions and are most often types of debt or fixed-income securities.
Non-Marketable Securities Examples
Government-issued debt instruments represent the majority of non-marketable securities. Some common examples are:
- US savings bonds
- Private shares
- Federal series bonds
- State and local government securities
Other non-marketable securities include bank accounts, life insurance investments, and company deposits.
The Bottom Line
As we’ve established, investment in marketable securities offers multiple benefits since they are highly liquid, easily transferable, and have a predictable yield. If you can make peace with their relatively low income, they can be a great way to invest.
Marketable Securities FAQs
What is a marketable security?
This is a financial instrument that can quickly be sold and converted into cash. Some of the most common examples are common and preferred shares, bonds, ETFs, government securities, etc.
Are marketable securities a cash equivalent?
Not all securities of this type are cash equivalents. For instance, equity or stock holdings can fluctuate in value, making them unsuitable. However, debt securities that mature in fewer than 90 days are cash equivalents.
Are marketable securities short-term investments?
This asset has a maturity period of less than a year, so it can be considered a short-term investment. This term applies to any investment with a closing period of fewer than three years.
Are marketable securities current assets?
Marketable securities are very liquid assets that holders can easily convert to cash. In accounting terminology, they are current assets and are often included in the working capital calculations on balance sheets.