Marketable Securities

Marketable Securities are often called cash equivalents and are even combined with cash on the same balance sheet item – ‘cash and cash equivalents’. This is, actually, a bit misleading.

By definition, marketable securities are very liquid securities that can be converted into cash very quickly (almost instantaneously) and have insignificant risk of change in value. Examples include commercial paper, banker's acceptances, Treasury bills (short-term government bonds), other money market instruments and other liquid securities with maturities of less than one year.

Some accounting scholars define marketable securities as the ones that mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. I personally think that maturity really does not matter that much. What matters is liquidity and risk of change in value.

Why is it misleading? Because there is no such thing as cash equivalent. Cash has zero chance of change in nominal value; marketable securities have a very small chance of that. But still higher than zero. Inflation affects both cash and securities, obviously.

To compensate for this chance, these securities offer interest at rate higher than the one you get from your corporate checking account where you park your cash (if you get it at all). Actually, this is the whole idea: invest your cash into marketable securities to get a slightly higher ROI (although it is still much lower than you can get from your internal investments).

Therefore, in addition to two abovementioned objectives, you acquire the third one – to set up a portfolio (with investment in securities you always need diversification) of marketable securities with the optimal risk/return profile.

Which will require the right methodology, a highly efficient business process and a competent portfolio manager. Fortunately, commercial banks usually offer all three – in a single package.