Definition and explanation:
Marketable securities are highly liquid securities such as stocks (both common and preferred), short-term bonds, commercial papers treasury bills and money market instruments etc. In order to qualify as a marketable security, the investment must be highly liquid – that is it must be quickly convertible into cash without significant loss in value.
Marketable securities are considered as liquid as cash. Rather than holding a large amount of cash, companies usually prefer to keep their liquid resources in the form of a right combination of cash and marketable securities.
Marketable securities are mostly classified as available for sale securities and are therefore listed in the balance sheet immediately after cash.
Advantages/benefits of marketable securities:
Investment in marketable securities provide the following additional advantages:
(1). Interest and dividend revenue
Marketable securities earn dividend or interest revenue for the company. If a company holds a large sum of cash and does not invest it anywhere, it will generate nothing for the company.
(2). Increase in market value:
Marketable securities also generate a return when their market value increases.
Unlike long term investments, purchase of marketable securities does not impact the liquidity position of the business. They can be quickly sold in the secondary financial markets to meet immediate cash needs of the company.
Balance sheet presentation of marketable securities
Marketable securities are classified as available for sale and are shown in the balance sheet at their current market value. It is a general example of the exception to the cost principle of accounting.