# Marketable Securities: Definition, Types, and Key Considerations

> **Definition**
>
> Marketable securities are liquid financial instruments that can be quickly converted into cash, typically maturing in less than a year.

## What Are Marketable Securities?

Marketable securities are liquid [financial instruments](https://www.investopedia.com/terms/f/financialinstrument.asp) that can be quickly converted into cash at a reasonable price. These are essential for businesses that need to manage short-term debt obligations. Common types of marketable securities are Treasury bills, common stocks, and money market instruments. There is a strong secondary market for these securities.

Marketable securities are included in a business's current assets and are an important part of evaluating its liquidity. They are included in calculating liquidity ratios, such as the current ratio or cash ratio.

### Key Takeaways

*   Marketable securities are liquid assets that can be quickly turned into cash at a reasonable price.
*   They include common stock, Treasury bills, and money market instruments, typically maturing in a year or less.
*   Companies use these securities to earn returns on idle cash while maintaining easy access to liquid assets.
*   Marketable securities are key in liquidity ratios, assessing a company's ability to meet short-term obligations.
*   Equity securities can be listed as current or non-current assets, depending on the expected holding period.

![Marketable Securities](https://www.investopedia.com/thmb/K3cXCkKIvGM2CEwXVQ9WFbztGXg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MarkettableSecurities-b632c277add041a899b2b4a25c653b25.jpg)

*— Investopedia / Xiaojie Liu*

## How Marketable Securities Work

Businesses usually keep cash reserves to prepare for quick actions like acquisitions or making contingent payments. Instead of keeping all cash without earning interest, businesses invest some in short-term [liquid](https://www.investopedia.com/terms/l/liquidasset.asp) securities. This way, instead of having cash sit idly, the company can earn returns on it. If a sudden need for cash emerges, the company can easily liquidate these securities. Examples of a short-term investment products are a group of assets categorized as marketable securities.

Marketable securities are defined as any unrestricted financial instrument that can be bought or sold on a public stock exchange or a public bond exchange. Therefore, marketable securities are classified as either marketable equity security or marketable debt security. Other requirements of marketable securities include having a strong [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp) that can facilitate quick buy and sell transactions, and having a secondary market that provides accurate price quotes for investors. The return on these types of securities is low due to the fact that marketable securities are highly liquid and are considered safe investments.

Examples of marketable securities include common stock, [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp), banker's acceptances, [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), and other [money market](https://www.investopedia.com/terms/m/moneymarket.asp) instruments.

## Factors to Consider with Marketable Securities

Analysts evaluate marketable securities during [liquidity ratio](https://www.investopedia.com/terms/l/liquidityratios.asp) analysis for a company or sector.. Liquidity ratios show how well a company can meet its short-term obligations. This ratio checks if a company can pay short-term debts with its liquid assets. Liquidity ratios include:

### Cash Ratio

$\begin{aligned} &\text{Cash Ratio} = \frac{ \text{MCS} }{ \text{Current Liabilities} } \\ &\textbf{where:} \\ &\text{MCS} = \text{Market Value of Cash and Marketable Securities} \\ \end{aligned}$

The [cash ratio](https://www.investopedia.com/terms/c/cash-ratio.asp) is calculated as the sum of the market value of cash and marketable securities divided by a company's current liabilities. Creditors prefer a ratio above 1.0, as this means that a firm will be able to cover all its short-term debt if it came due now. However, most companies have a low cash ratio since holding too much cash or investing heavily in marketable securities is not a highly profitable strategy.

### Current Ratio

$\begin{aligned} &\text{Current Ratio} = \frac{ \text{Current Assets} }{ \text{Current Liabilities} } \\ \end{aligned}$

The [current ratio](https://www.investopedia.com/terms/c/currentratio.asp) measures a company's ability to pay off its short-term debts using all its current assets, which includes marketable securities. It is calculated by dividing current assets by current liabilities.

### Quick Ratio

﻿ $\begin{aligned} &\text{Quick Ratio} = \frac{ \text{Quick Assets} }{ \text{Current Liabilities} } \\ \end{aligned}$﻿

The [quick ratio](https://www.investopedia.com/terms/q/quickratio.asp) factors in only quick assets into its evaluation of how liquid a company is. Quick assets are defined as securities that can be more easily converted into cash than current assets. Marketable securities are considered quick assets. The formula for the quick ratio is quick assets / current liabilities.

## Exploring Different Types of Marketable Securities

### Equity Securities

Marketable equity securities can be either common stock or [preferred stock](https://www.investopedia.com/terms/p/preferredstock.asp). They are equity securities of a public company held by another corporation and are listed in the [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) of the holding company. If the stock is expected to be liquidated or traded within one year, the holding company will list it as a current asset. Conversely, if the company expects to hold the stock for longer than one year, it will list the equity as a non-current asset. All marketable equity securities, both current and non-current, are listed at the lower value of cost or market.

If a company invests in another's equity to gain control, the securities aren't marketable. The company instead lists them as a [long-term investment](https://www.investopedia.com/terms/l/longterminvestments.asp) on its balance sheet.

### Debt Securities

Marketable [debt securities](https://www.investopedia.com/terms/d/debtsecurity.asp) are considered to be any short-term bond issued by a public company held by another company. Marketable debt securities are normally held by a company in lieu of cash, so it's even more important that there is an established secondary market. All marketable debt securities are held at cost on a company's balance sheet as a current asset until a gain or loss is realized upon the sale of the debt instrument.

Marketable debt securities are held as short-term investments and are [expected to be sold within one year](https://www.investopedia.com/terms/e/equity-linked-security.asp). If a debt security is expected to be held for longer than one year, it should be classified as a long-term investment on the company's balance sheet.

## The Bottom Line

Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. The main types of marketable securities are equity (common stock) and debt securities (Treasury bills and commercial paper). These securities are advantageous for businesses, as they enable earning returns on idle cash while maintaining the ability to meet short-term financial obligations.

Marketable securities are part of calculating liquidity ratios and fundamental analysis because they gauge a company's ability to meet its debt obligations.

It's important to note that because marketable securities offer safety and liquidity, they provide lower returns compared to other investment options.

> **Article Sources**
>
> 1.  Quicken Loans. “[What Are Liquid Assets, and Why Are They Important?](https://www.quickenloans.com/learn/what-are-liquid-assets-and-why-are-they-important)”
>     
> 2.  CFA Institute. “[Chapter 15: The Functioning of Financial Markets](https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/15-the-functioning-of-financial-markets.ashx).” Page 61.
>     
> 3.  Robinhood. “[What Are Marketable Securities?](https://learn.robinhood.com/articles/5Cl4uCIon9ydHOOq5xyq1c/what-are-marketable-securities/)”
>     
> 4.  Oracle Netsuite. “[What Is Liquidity and Why Does it Matter to Businesses?](https://www.netsuite.com/portal/resource/articles/accounting/liquidity.shtml)”
>     
> 5.  CFA Institute. “[Chapter 10: Equity Securities](https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/10-equity-securities.ashx).” Page 313.
>     
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>     
> 7.  Experian. “[What Are Debt Securities and Are They Good Investments?](https://www.experian.com/blogs/ask-experian/what-is-debt-security/)”