Marketable securities, often referred to as marketable financial assets or marketable investments, are financial instruments that are easily and readily convertible into cash with a known market price. These securities represent ownership in another company, government, or organization and are typically considered short-term investments because they can be bought and sold quickly, usually within one year or less. Marketable securities serve as a way for individuals and organizations to invest excess funds temporarily while maintaining liquidity. There are three primary types of marketable securities:
- Treasury Bills (T-Bills):
- Treasury bills are short-term debt securities issued by the U.S. Department of the Treasury. They have maturities ranging from a few days to one year. T-Bills are considered one of the safest investments because they are backed by the U.S. government. They are typically sold at a discount to their face value, and the difference between the purchase price and face value represents the interest earned.
- Certificates of Deposit (CDs):
- Certificates of deposit are time deposits offered by banks and credit unions. They have fixed terms ranging from a few months to several years. CDs offer higher interest rates than regular savings accounts, but they require investors to keep their funds locked in for the duration of the term. Early withdrawal may result in penalties.
- Commercial Paper:
- Commercial paper is a short-term debt instrument issued by corporations, banks, and other financial institutions to raise capital for their short-term financing needs, such as covering operating expenses. It typically has maturities of less than 270 days and is often sold at a discount to its face value.
Marketable securities are considered liquid assets because they can be easily sold on public markets, such as stock exchanges or over-the-counter (OTC) markets. This liquidity makes them attractive to investors who need to access cash quickly or want to earn a modest return on their surplus funds while preserving capital.
Key characteristics of marketable securities include:
- Liquidity: They can be readily converted into cash without significant price fluctuations.
- Low Risk: Generally, marketable securities are considered low-risk investments compared to other asset classes like stocks or real estate.
- Interest Income: Investors earn interest income from these securities, typically in the form of regular interest payments or through the difference between purchase price and face value (in the case of T-Bills and some CDs).
- Safety: Depending on the type of security, they can be very safe investments, particularly those backed by the U.S. government.
It’s important to note that while marketable securities are generally considered safe, they may still carry some level of risk, especially if the issuer defaults or the market experiences unexpected fluctuations. Investors should carefully assess their risk tolerance and investment goals when considering marketable securities as part of their portfolio.