Marketable securities are investments that are highly liquid, meaning that they can be quickly sold in the secondary financial markets in large amounts for cash. A company might invest in these types of securities as a way to preserve cash for unanticipated events. Investors also select these short-term investment vehicles to seize certain opportunities in the financial markets.
There are different types of marketable securities, and the underlying theme among all of them is that they are traded, or bought and sold, frequently. This is a sign of liquidity. Those that are types of bonds or certificates of deposit must have a maturity date or time at which a contract expires of no less than 12 months out. Bonds are debt instruments, while certificates of deposit are savings certificates, although both pay investors an interest rate over the life of the contract. These securities trade in the secondary market, a segment of the financial markets where previously issued securities are bought and sold.
Cash is a type of marketable security, and it can be held in a checking or savings account, because both allow for quick access to capital. Money market instruments are another common type of these securities, although features might vary depending on the region in which they're purchased. In the United States, for example, treasury bills are a commonly purchased money market security.
U.S. treasury bill investments are sold in increments of $1,000 US Dollars (USD) and are short-term in nature. They do not pay ongoing interest income the way that long-term bonds do, but they are sold at a discount price. When it comes time to redeem a treasury bill at the maturity date, the U.S. government repays investors the full market price.
There are various purposes for marketable securities. For instance, a company with cash on hand might be looking for a place to invest that money. Marketable securities are a viable option if that company might need access to that capital in the short term, that is, in less than one year. Financial institutions such as banks and insurance companies often need quick access to large amounts of capital and therefore might invest a significant portion of earnings into marketable securities.
Companies in other sectors of the economy, such as manufacturing, might invest in these short-term instruments but not as heavily as financial institutions do. Manufacturing companies, for instance, earmark much of their capital for expenses such as machinery and equipment. A reason to invest in marketable securities might be to preserve capital for taxes or to pay investor dividends.