Marketable securities

Definition

Marketable securities are financial instruments that can be quickly converted into cash at a reasonable price, typically within a year. These include stocks, bonds, and other investments that are actively traded in financial markets, making them highly liquid assets. They play a crucial role in cash and marketable securities management, providing companies with the flexibility to respond to immediate cash needs while also earning returns on excess cash.

5 Must Know Facts For Your Next Test

1. Marketable securities are considered a current asset on a company's balance sheet due to their short-term nature and high liquidity.
2. These securities provide companies with an opportunity to earn interest or capital gains while keeping their cash readily available.
3. Marketable securities can include government bonds, corporate bonds, and publicly traded stocks, all of which have established markets.
4. The classification of marketable securities is essential for effective cash management strategies, allowing firms to optimize their investment returns.
5. Companies must regularly assess the fair market value of their marketable securities to ensure accurate financial reporting and decision-making.

Review Questions

• How do marketable securities contribute to a company's liquidity management strategy?
  • Marketable securities play a significant role in a company's liquidity management strategy by providing quick access to cash without needing to sell long-term assets. They allow companies to invest excess cash while ensuring they have the funds available to meet short-term obligations. By holding marketable securities, companies can strike a balance between earning returns on their idle cash and maintaining sufficient liquidity for operational needs.
• Discuss the risks associated with investing in marketable securities and how they impact overall financial strategy.
  • Investing in marketable securities involves various risks, such as market volatility, interest rate changes, and credit risk. These risks can affect the value of the securities and the returns that companies expect to earn. A sound financial strategy must account for these risks by diversifying investments across different types of marketable securities and continuously monitoring market conditions. This helps ensure that the company is not overly exposed to any single investment type or market fluctuation.
• Evaluate the implications of fluctuations in the market value of marketable securities on a firm's financial statements and overall financial health.
  • Fluctuations in the market value of marketable securities can have significant implications for a firm's financial statements, particularly its balance sheet and income statement. If the value of these securities declines, it can lead to unrealized losses, impacting equity and potentially altering investor perceptions of the company's stability. Conversely, increases in market value can enhance asset values and provide opportunities for capital gains. Therefore, consistent evaluation and reporting of these fluctuations are crucial for providing stakeholders with an accurate view of the company's financial health.

Related terms

Liquidity: The ease with which an asset can be converted into cash without affecting its market price.

Short-term investments: Investments that are intended to be held for one year or less, typically characterized by lower risk and higher liquidity.

Cash equivalents: Highly liquid assets that are easily convertible to known amounts of cash, with minimal risk of changes in value.