What Are Marketable Securities?
Marketable securities are financial instruments that can be sold or converted into cash (at reasonable value) within one year. They are highly liquid investments that are generally issued by businesses to raise funds for operating expenses or expansion. When a business invests in marketable securities, it is usually to generate short-term earnings from excess cash.
Characteristics of Marketable Securities
Marketable securities have the following characteristics:
Be available for purchase and sale on public exchanges
Be expected to be converted into cash within one year
Have a maturity date of one year or less
Have a strong secondary market that allows for timely transactions at fair market price
How Do Marketable Securities Work?
There are three different ways marketable securities can be categorized by an investor. Their intended purpose will determine how they are handled from an accounting perspective.
These marketable securities are purchased as a means to generate short-term profit and are generally held for less than one year. They are listed at fair value on a balance sheet, and any gains or losses made during the holding period are also recorded. Temporary fluctuations in market value (unrealized gains or losses) are recorded on an income statement.
Held to Maturity
These marketable securities are held by companies until they reach their maturity date. If that date is within one year of the purchase date, they are considered short-term investments (and therefore fall under current assets). If the date is greater than one year from the purchase date, they are considered long-term investments and are non-current assets.
They are listed at fair value on a balance sheet but do not record temporary fluctuations in market value (unrealized gains or losses). However, any realized gains or losses (e.g. additional costs, interest income) are included on the balance sheet.
Available for Sale
These are debt and equity securities that aren’t intended to be traded for profit or held until maturity. They are listed at fair value on a balance sheet, along with any unrealized gains or losses. Unlike trading securities, unrealized gains and losses do not need to be reported on an income statement.
Types of Marketable Securities
There are many different types of marketable securities but they all fall under one of two categories: marketable debt securities or marketable equity securities.
Marketable Debt Securities
Marketable debt securities are short-term bonds (<1 year) issued by a government or public company and held by an investor. Examples include:
Example of Marketable Debt Securities
Company ABC is looking to raise money to expand into a new market. Rather than using the limited cash it has on hand, it issues 10,000 corporate bonds for $1,000 each at 10% interest. The bonds mature in one year, at which point they will be worth $1,100 each (110% of $1,000).
Company XYZ has extra cash available, so they purchase 1,000 of the bonds for a total price of $1,000,000. They plan on holding the bonds until maturity, at which point they can be redeemed for a total of $1,100,000. Since the maturity period is one year or less, these bonds are considered marketable debt securities.
Marketable Equity Securities
Marketable equity securities are equities issued by a public company and held by an investor. Examples include:
Marketable equity securities are generally considered short-term investments and listed as current or non-current assets depending on their intended purpose. However, if the securities are purchased as a means to acquire or control the issuing company, they would be reported as long-term investments.
Example of Marketable Equity Securities
Company LMN is a successful car manufacturer that plans on expanding into boat manufacturing. In order to raise capital for this new venture, they plan on launching an initial public offering (IPO), making a portion of their equity available for sale.
Company QRS has extra cash and believes that Company LMN’s shares will increase in value after the IPO, so it buys 1,000 shares intending to generate profit. After one month, the share price increases by 25%, so QRS sells their shares. Since the shares were held for less than one year, they are considered marketable securities.
Are Marketable Securities Current Assets?
In most cases, yes. Current assets are any assets that are expected to be sold, consumed, utilized, or exhausted within one year. Marketable securities generally meet that criteria.
However, there is one exception: If a marketable security is held to maturity (and the maturity date is greater than one year), it is considered a long-term investment and listed as a non-current asset at its amortized cost. These types of investments are less liquid and often considered non-marketable securities, which may be associated with higher risk.
Where Do Marketable Securities Go on a Balance Sheet?
As long as marketable securities are expected to be converted into cash within one year, they are listed in the current assets section of the investor’s balance sheet at their current market value. If they are expected to be held for longer than one year, they are listed as non-current assets.