Marketable Security What It is How It Works

Marketable Security: What It is, How It Works

What is a Marketable Security?

A marketable security is any equity or debt instrument that can be converted into cash easily. Stocks, bonds, short-term commercial paper, and certificates of deposit (CDs) are all marketable securities because there is a public demand for them and they can be readily converted into cash.

Understanding Marketable Securities

Marketable securities are assets that can be sold quickly, generally through a quoted public market. Bonds and stocks that are publicly traded fit this description. Marketable securities offer investors liquidity comparable to cash along with the ability to earn a return when the assets are not being used. In contrast, shares in private corporations are illiquid and are not considered marketable securities because they are more difficult to value and sell, typically taking longer to convert to cash than publicly traded stocks.

Marketable Securities and Investor Demand

Part of what drives liquidity in the secondary market is supply and demand. If a particular security becomes highly desirable due to a major product development advancement or favorable press, its value increases. As the desire for the security rises, the number of available securities remains the same, making it easier to achieve both higher selling prices and quick sales.

However, profitability is not a requirement for a security to be considered marketable. As long as it can be sold, it is considered marketable. Most stocks on major exchanges can be unloaded even in a falling market. On smaller exchanges or the OTC markets, there are many stocks that may require more time to sell in a thin market.

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Marketable Securities and the Balance Sheet

In accounting terms, marketable securities are assets that can be converted into cash within a year. These assets are considered current assets and are included with cash reserves for ratios like the quick ratio. Any assets that are unlikely to be converted to cash or are intended for longer term use will be reported as non-current assets.

Unmarketable Securities

Unmarketable securities are securities that are not highly desirable in the secondary market. This can include items with limited returns, such as low-yield Treasuries, U.S. savings bonds, and other debt securities. Unmarketable securities often provide a stable place for funds to reside but offer little interest or yield. Overall, these investments are considered low risk, which is reflected in their overall low yield, but they can provide a steady source of monthly income. (For related reading, see "Common Examples of Marketable Securities")

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