Understanding Marketable Securities
Marketable securities refer to financial instruments that can be easily bought or sold in the financial markets due to their high liquidity and fungibility. These securities are typically traded on organized exchanges or over-the-counter (OTC) markets and include stocks, bonds, and money market instruments. Investors often purchase marketable securities as a means of generating returns on their investment portfolio while maintaining liquidity and minimizing risk.
Key Points about Marketable Securities
- Types of Marketable Securities: Marketable securities encompass a variety of investment instruments, including:
- Stocks: Represent ownership stakes in publicly traded companies. Investors purchase stocks with the expectation of earning dividends and capital appreciation.
- Bonds: Debt securities issued by governments, corporations, or municipalities to raise capital. Bondholders receive periodic interest payments (coupon payments) and the return of the principal amount at maturity.
- Money Market Instruments: Short-term debt securities with maturities of one year or less, such as Treasury bills, commercial paper, and certificates of deposit (CDs). Money market instruments are known for their high liquidity and low risk.
- Liquidity: One of the defining characteristics of marketable securities is their high liquidity, meaning they can be easily bought or sold in the financial markets without significantly impacting their market value. Investors can quickly convert marketable securities into cash to meet short-term financial needs or capitalize on investment opportunities.
- Fungibility: Marketable securities are fungible, which means that each unit of a particular security is interchangeable with any other unit of the same security. For example, shares of a company’s common stock are fungible, and investors can buy or sell any number of shares in the open market without distinguishing between individual shares.
- Investment Objectives: Investors may choose to invest in marketable securities for various reasons, including capital appreciation, income generation, portfolio diversification, and capital preservation. The selection of marketable securities depends on investors’ risk tolerance, investment horizon, and financial goals.
- Risk and Return: Marketable securities offer varying levels of risk and return depending on their characteristics and market conditions. Stocks are generally considered more volatile but offer higher potential returns over the long term, while bonds provide regular income streams and greater stability but may offer lower returns. Money market instruments are the least risky but typically offer lower returns than stocks and bonds.
Example of Marketable Securities
Let’s consider an example of how an investor might build a portfolio of marketable securities:
John is a conservative investor looking to build a diversified investment portfolio that balances risk and return. He decides to allocate his investment funds across different types of marketable securities:
- Stocks: John invests a portion of his funds in blue-chip stocks of well-established companies with a history of stable earnings and dividend payments. He believes that these stocks will provide long-term capital appreciation and dividend income while minimizing the risk of loss.
- Bonds: To further diversify his portfolio and generate additional income, John invests in a mix of government bonds and high-quality corporate bonds with varying maturities. He chooses bonds with investment-grade credit ratings to reduce credit risk and ensure the safety of his principal investment.
- Money Market Instruments: To maintain liquidity and preserve capital, John allocates a portion of his funds to money market instruments such as Treasury bills and short-term CDs. These instruments provide stability and liquidity while earning a modest return on his investment.
By diversifying his portfolio across different types of marketable securities, John aims to achieve his investment objectives of generating income, preserving capital, and minimizing risk over the long term.
References:
Investopedia. (n.d.). Marketable Securities. Retrieved from https://www.investopedia.com/terms/m/marketablesecurities.asp
Corporate Finance Institute. (n.d.). Marketable Securities. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/marketable-securities/
Conclusion
Marketable securities are financial instruments that can be easily bought or sold in the financial markets due to their high liquidity and fungibility. They include stocks, bonds, and money market instruments, which investors purchase to achieve various investment objectives such as capital appreciation, income generation, and capital preservation. Marketable securities offer investors the flexibility to build diversified investment portfolios tailored to their risk tolerance, investment horizon, and financial goals. Understanding the characteristics and risks associated with marketable securities is essential for making informed investment decisions and maximizing returns while minimizing risk.