Marketable Securities

Marketable securities are financial instruments that can be bought and sold quickly on public markets at prices that are easy to observe. They include Treasury bills, commercial paper, certificates of deposit, government and corporate bonds, money market fund shares and stocks listed on an exchange. Companies hold them mainly to earn a return on cash they do not need immediately while keeping the ability to turn it back into cash within days.

On the balance sheet, marketable securities that the company expects to sell or that mature within a year are reported as current assets, usually right after cash and cash equivalents. Very short-term holdings, typically with an original maturity of three months or less, are treated as cash equivalents instead. Holdings the company plans to keep longer are reported as long-term investments.

• Liquidity: they provide a reserve that can be drawn on quickly for payroll, supplier payments, debt repayment or an acquisition.
• Return: they earn more than an ordinary bank deposit, which matters for companies with large cash balances.
• Planned outflows: firms build up holdings ahead of known payments, such as a tax bill or bond maturity, and match maturities to those dates.
• Seasonal businesses park surplus cash from busy months until it is needed in slow months.

Corporate treasury management policies normally limit holdings to high-quality, short-dated instruments, because the purpose is safety and liquidity rather than speculative gain.

Under US GAAP, the treatment depends on whether the security is debt or equity:

• Trading debt securities, bought to sell in the near term, are carried at fair value with changes recognized in net income.
• Available-for-sale debt securities are carried at fair value, with unrealized gains and losses recorded in other comprehensive income until sale.
• Held-to-maturity debt securities are carried at amortized cost; because the company commits to keeping them, they are often not described as marketable in the usual sense.
• Equity securities with a readily determinable fair value are measured at fair value through net income, following ASU 2016-01.

IFRS 9 classifies financial assets by business model and cash flow characteristics into amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Listed securities are usually valued using level 1 inputs in the fair value hierarchy, meaning quoted prices in active markets.

A manufacturer has $8,000,000 of surplus cash. On 1 October it buys $5,000,000 of six-month Treasury bills and $3,000,000 of listed shares as a short-term investment. At 31 December the Treasury bills, which it intends to hold to maturity, have accrued $60,000 of interest. The shares are worth $3,150,000. The company reports interest income of $60,000 and, under US GAAP, an unrealized gain of $150,000 on the equity securities in net income. Its balance sheet shows marketable securities of $5,060,000 plus $3,150,000, or $8,210,000, within current assets. If the share price falls to $2,900,000 in January, the company recognizes a $250,000 loss in that quarter.

Because they can be converted to cash quickly, marketable securities are included in the stricter measures of liquidity. The quick ratio adds cash, marketable securities and receivables and divides the total by current liabilities, while the cash ratio uses only cash and marketable securities. Analysts check the notes to see what the securities actually are, because holdings described as marketable can include instruments that become hard to sell in a crisis. In 2008, for example, many companies discovered that auction rate securities they had treated as near-cash could not be sold when the auctions failed. Large technology companies hold some of the biggest corporate portfolios, often tens of billions of dollars, mainly in government and high-grade corporate debt, which is why their liquid assets are scrutinized closely by investors.