What Are Marketable Securities? Definition & Examples

What Is a Marketable Security?

A marketable security is a form of security that can be sold or otherwise converted to cash in less than a year. These products are considered relatively liquid compared to products that are locked into long-term positions.

To be considered marketable, a security must have a face value or near-face value transaction within the one-year period. There must also be no restriction on liquidating or selling this product within less than a year.

Virtually any product short of a junk bond will have some short-term sale price. If you purchase a 20-year government bond, you could absolutely sell this product less than a year later. However, you wouldn't get its value at maturity. You would get a sale price that balances the high security of this product against the time value of having that money locked up for 20 years. This is a salable security, but not a marketable security.

What Are Some Types of Marketable Securities?

Marketable securities are securities that can be sold quickly, typically within a year. Some of the most classic forms of marketable securities are:

• Shares of corporate ownership, such as stocks

• Debt, such as government bonds

• Interest-bearing assets such as certificates of deposit.

• Commercial paper

• Shares of a fund, such as a mutual fund and exchange-traded fund

• Certain futures and options

Funds in private equity, for example, wouldn't be considered marketable securities because these types of investments are locked up long-term, usually at least a few years.

Why Do Marketable Securities Matter?

Marketable securities are a measure of how much capital a business can access for any upcoming spending.

When a business calculates its assets and total net worth it has two sections of the balance sheet: current assets and non-current assets. Anyone who has spent much time overseas might recognize this terminology, as outside of the U.S. most banks also use this language for personal banking. What we call a checking account, the cash intended for immediate access, most other countries call a "current account."

Along with cash holding, a company's current account will include all assets that it could convert into cash for face value within one year. This includes all marketable securities along with any significant property that the company anticipates liquidating in the near future.

A company's non-current account will measure all long-term assets that the business either can't or won't sell in the coming year. This typically includes all securities with a longer maturity date as well as any major property that the company doesn't intend to sell right away.

Together this evaluation gives a sense of the company's total holdings and the company's near-term spending power.

It is a valuable figure for multiple forms of analysis. Executives at the company will use it to figure out how aggressively they should spend in the coming year, as well as to understand their flexibility to respond to short-term opportunities. Creditors will use marketable securities when deciding terms on which to extend a loan, as it tells them how easily a company can pay them back without having to devalue assets in a fire sale. Analysts and investors use marketable securities when performing liquidity analyses.

A company will also measure its marketable securities to figure out how many assets it can move from the current to the non-current side of its balance sheet. Over-investing in short-term assets can be just as wasteful as under-investing. While a company needs to have enough cash or cash equivalents to respond to upcoming business expenses, long-term assets typically have significantly higher rates of return. Keeping too much money in marketable securities is wasteful and will mean accepting a lower rate of return for unspent cash that could have been better used elsewhere.

Proper corporate governance, then, looks to find the balance.

Non-Current Marketable Securities

Finally, whether a company marks a product as a marketable security or not may depend on its intentions.

A company might buy a security that could typically be highly liquid but it will intend to keep that product for a longer term. In this case, because the company doesn't intend to sell the asset within the next year, it will list the asset as non-current and will not consider it a marketable security.

A common example of this is when companies purchase shares of another company's stock as part of an acquisition bid.

Shares of stock are highly liquid; you can sell them at any time. As a result, ordinarily, a company would consider all of its stock holdings as marketable. However, when a company is trying to acquire a rival it will hold those shares long-term and consider them non-marketable.

The same can be said of debt instruments. For example, a bank might extend a 20-year mortgage. How that bank classifies the mortgage will depend entirely on its intentions. Ordinarily, this would not be considered a marketable security since it will not fully pay off within the next year. However, if the bank extended this mortgage with the intent to sell it as a securitized asset, it may list the mortgage under current assets and classify the note as marketable.

The mortgage wouldn't meet the standard definition of a marketable security, but the bank will nevertheless build that note's sale price into its business plan and liquidity calculations.