What is a marketable security?
A marketable security is a form of security that can be sold or converted to cash in less than one year. These products are considered relatively liquid compared to products that are locked into long-term positions.
To be considered negotiable, a security must have a transaction of par or near par value within a one-year period. There should also be no restrictions to liquidate or sell this product in less than a year.
Virtually any product that is not a junk bond will be priced to sell in the short term. If you buy a 20-year government bond, you absolutely could sell this product less than a year later. However, you would not get its value at maturity. You’ll get a sales price that balances the high security of this product with the time value of having that money locked up for 20 years. This is a salable security, but not a marketable security.
What are some types of marketable securities?
Marketable securities are securities that can be sold quickly, usually within a year. Some of the more classic forms of marketable securities are:
• Corporate-owned stocks, such as stocks
• Debt, such as government bonds
• Interest-bearing assets, such as certificates of deposit.
• Commercial paper
• Shares of a fund, such as a mutual fund and an exchange-traded fund
• Certain futures and options
Private equity funds, for example, would not be considered marketable securities because these types of investments are locked in for the long term, typically for at least a few years.
Why do marketable securities matter?
Marketable securities are a measure of how much capital a company can access for any future expenses.
When a company calculates its assets and total net worth, it has two sections of the balance sheet: current assets and non-current assets. Anyone who has spent a lot of time abroad might recognize this terminology, since outside of the US, most banks use this language for personal banking as well. What we call a checking account, the cash meant for immediate access, most other countries call it a “checking account.”
Along with holding cash, a company’s checking account will include all the assets it could convert to cash at face value within a year. This includes all marketable securities along with any major property the company anticipates liquidating in the near future.
A company’s non-current account will measure all long-term assets that the company is unable or unwilling to sell in the coming year. This generally includes all securities with a longer maturity date, as well as any major property that the company does not intend to sell immediately.
Taken together, this assessment gives an idea of the company’s total holdings and the buying power of the company in the short term.
It is a valuable figure for multiple forms of analysis. Company executives will use it to determine how aggressively they should spend in the coming year, as well as understand their flexibility in responding to near-term opportunities. Creditors will use marketable securities when deciding the terms on which to grant a loan, as it tells them how easily a company can repay them without having to devalue the assets in a forced sale. Analysts and investors use marketable securities when conducting liquidity analysis.
A company will also measure its marketable securities to determine how many assets it can move from the current to the non-current side of its balance sheet. Investing too much in short-term assets can be just as wasteful as investing too little. While a business needs to have enough cash or cash equivalents to meet upcoming business expenses, long-term assets typically have significantly higher rates of return. Holding too much money in marketable securities is wasteful and will mean accepting a lower rate of return for unspent cash that could have been better used elsewhere.
Good corporate governance, then, seeks to find balance.
Non-Current Marketable Securities
Finally, whether or not a company marks a product as a tradable security may depend on its intentions.
A company might buy a security that would normally be highly liquid, but will intend to hold that commodity for the longer term. In this case, because the company does not intend to sell the asset within the next year, it will list the asset as non-current and will not consider it a marketable security.
A common example of this is when companies buy another company’s shares as part of a takeover offer.
Equity shares are highly liquid; You can sell them at any time. As a result, a company would normally consider all of its stock holdings to be tradable. However, when a company is trying to acquire a rival, it will hold those shares for the long term and consider them non-tradable.
The same can be said of debt instruments. For example, a bank might extend a 20-year mortgage. How that bank categorizes the mortgage will depend entirely on your intentions. Typically this would not be considered a marketable security as it will not be paid off in full within the next year. However, if the bank extended this mortgage with the intention of selling it as a securitized asset, it may include the mortgage in current assets and classify the note as negotiable.
The mortgage would not meet the standard definition of a marketable security, but the bank will nonetheless incorporate the sale price of that note into its business plan and liquidity calculations.