Reviewed by Sep 28, 2020| Updated on
What are Marketable Securities?
Marketable securities are highly-liquid financial tools that can be sold or converted into cash within a year of investment. Businesses issue these securities to raise capital for operating expenses or business expansion. On the other hand, a business invests in marketable securities to make some short-term earnings with the cash at hand.
Purpose of Investing in Marketable Securities
Usually, businesses invest in marketable securities for one of three reasons. Based on the reason for investment, the way of handling the funds is determined.
1. Held Until Maturity: Companies hold on to the securities until the maturity date. If the date is well within a year's time, the investment is called short-term investment. If the maturity date exceeds a year from the purchase date, they are called long-term investment and non-current assets.
Their fair value is listed in the company's balance sheet, and the temporary fluctuations are ignored. Any realised gains or losses are listed in the balance sheet.
2. For Trading: The marketable securities are purchased for the sole purpose of generating a short-term profit and are held for a period less than a year. Along with listing the fair value of the holdings in the balance sheet, any gains and losses incurred during the holding period are also recorded. If there are any temporary fluctuations in the market, they are recorded in the income statement.
3. For Sale: If the securities are not purchased for trading or to be held until maturity, they are purchased to sell. They are listed at the fair value in the balance sheet with unrealised gains or losses. Unlike in the second case, temporary gains and losses need not be reported in the income statement.