What are marketable securities as a short term investment option?
First, what are marketable securities?
Many businesses prefer to invest most of their liquid resources in marketable resources instead of keeping them in idle cash.
Businesses prefer holding a greater portion of their liquid resources in this form, because marketable securities can be easily and quickly bought or sold (they are highly liquid, that is, easily converted into cash) at quoted market prices daily, on securities exchanges.
Marketable securities consist basically of bonds and common stock of publicly owned companies. Investments in marketable securities yield returns in the form of interest and dividends.
When marketable securities are bought, how is the purchase price calculated?
ABC Company makes a short term investment by buying 10,000 shares of the common stock of XYC Company at $0.35 per share. ABC also pays a brokerage commission of $500. The purchase price is $4,000 (10,000 x $0.35 + $500).
What happens when marketable securities are sold?
Either of two things happens when marketable securities are sold. The sales of a short term investment in marketable securities can either produce a gain or result in a loss.
A gain is produced when the sales price is more than the cost. For an example, if ABC Company sells the entire 10,000 shares of its XYC company for $0.50 per share and paid a brokerage commission of $500, the gain is $500 (10,000 x $0.50 - $500) - $4,000).
A sale at $0.40 plus a brokerage commission of $500 will result in a loss of $500.
A gain on sale of marketable securities by ABC Company could result in an increase in its market value. A loss on the other hand, could result in decrease in its market value.
Businesses classify their marketable securities on the basis of the length of time they decide to hold the securities. So, marketable securities may be classified as any of;
1. available for sale (APS) securities,
2. held-to-maturity (HTM) securities and,
3. trading securities.
1. Available-for-Sale (AFS) Securities.
Businesses hold available-for sale securities in both equity and debt for a while but can sell them as they often have a ready market price available. Most businesses classify their securities as AFS.
2. Held-to-Maturity Securities:
Held-to-maturity (HTM) securities are purchased and held until maturity.
Held-to-maturity investments are commonly made in the form of bonds. Bonds have fixed maturity date and predetermined payment dates. Also, investors usually purchase bonds with the intent of holding them until they mature.
3. Trading securities
Trading marketable securities are bought and held for sale in the short term. The purpose for holding them is to make a profit from quick trade as opposed to holding them until maturity.
