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Understand what marketable securities are, how they work, and why they are widely used for short-term liquidity management.
Marketable securities are financial instruments that can be quickly converted into cash with minimal loss in value. They are commonly used by individuals and businesses to park surplus funds for short durations while maintaining liquidity. Due to their liquidity and short-term nature, marketable securities are commonly used within financial planning and balance sheet management frameworks.
Marketable securities are short-term financial instruments that can be easily bought or sold in active financial markets. Their defining feature is high liquidity, which means they can be converted into cash quickly without significantly affecting their price. These instruments usually have short maturity periods and are issued by governments, financial institutions, or well-established companies.
From an investor perspective, marketable securities are often used to hold funds temporarily while maintaining liquidity. For businesses, they act as a liquidity buffer that ensures funds are available to meet short-term obligations when required.
From an accounting and financial reporting perspective, marketable securities are typically classified as current assets. They appear on the balance sheet because they are expected to be converted into cash within a year. Companies invest in these instruments when they have excess cash that is not immediately needed for operations.
The value of marketable securities may fluctuate based on market conditions, but because they are actively traded, companies can liquidate them quickly. This makes them a practical tool for managing working capital and maintaining financial flexibility.
Marketable securities share several common characteristics that distinguish them from other investments:
High liquidity due to active secondary markets
Short maturity period, usually less than one year
Relatively low risk compared to long-term investments
Easy transferability and standardised pricing
Suitable for short-term cash management
These features align with conservative financial approaches focused on liquidity and capital preservation.
Marketable securities can be grouped into different categories based on their structure and issuer. Each type serves a slightly different purpose while maintaining high liquidity.
Common types of marketable securities include:
Treasury bills
Treasury bills are short-term government securities with low credit risk and fixed maturity, commonly used for parking surplus funds safely.
Commercial paper
These are unsecured short-term instruments issued by financially strong companies to meet working capital needs, usually offering higher returns than T-bills.
Certificates of deposit
Issued by banks, these have fixed tenures and interest rates, and can be traded before maturity in the secondary market.
Money market instruments
This category includes various short-term debt instruments with maturities typically up to one year, designed for short-term liquidity management.
Equity shares of listed companies
Shares that are actively traded on stock exchanges can be quickly bought or sold, though their prices may fluctuate more than debt instruments.
Different instruments are associated with varying levels of risk, liquidity, and potential returns.
Consider the following comparison between marketable and non-marketable securities:
| Aspect | Marketable Securities | Non-Marketable Securities |
|---|---|---|
Liquidity |
High |
Low |
Transferability |
Easily transferable |
Restricted or not transferable |
Market Availability |
Traded in active markets |
No active secondary market |
Risk Level |
Generally lower |
Can vary, often higher |
Maturity |
Short-term |
Often long-term |
Companies invest in marketable securities to manage excess cash efficiently. Instead of keeping large amounts of idle cash, businesses use these instruments to earn returns while preserving liquidity.
They are also used as a buffer for operational expenses, debt repayments, and unforeseen financial requirements. By investing in marketable securities, companies maintain financial stability without compromising access to funds.
Marketable securities offer several advantages:
Quick conversion into cash
Lower risk compared to long-term investments
Helps optimise short-term cash utilisation
Provides flexibility in financial planning
Suitable for conservative investment strategies
These benefits explain their widespread use in corporate finance.
Despite their usefulness, marketable securities have certain limitations:
Generally lower returns compared to long-term investments
Exposure to short-term market price fluctuations
Returns may not always beat inflation
Limited wealth creation potential over the long term
Understanding these limitations helps set realistic expectations.
Marketable securities are highly liquid, short-term financial instruments that allow individuals and businesses to manage surplus cash efficiently while earning modest returns. They provide quick access to funds, help optimise short-term cash management, and include instruments such as treasury bills, commercial paper, and certificates of deposit. While they offer lower risk and greater flexibility, their returns are generally modest compared to long-term investments.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Marketable securities are short-term, liquid financial instruments that can be easily bought or sold in the market. Common examples include treasury bills, commercial paper, certificates of deposit, and actively traded equity or debt securities.
Marketable securities are generally classified as current assets because they are intended to be converted into cash within a short time frame, usually within one year, and are held to manage liquidity or short-term funding needs.
Marketable securities are often referred to as short-term investments or liquid investments. These terms highlight their ease of conversion into cash and their role in meeting immediate financial or liquidity requirements.
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Posted on 19 Dec
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