In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of marketable securities.
This read will help you get started with understanding marketable securities on the balance sheet of a business.
Marketable securities are financial instruments that can be converted into cash easily by the firm. Marketable securities are recorded in the balance sheet along with other current assets because of their nature. You can find marketable securities on a firm’s balance sheet under the Cash and cash equivalents section.
Types of marketable securities:
There are various types of marketable securities available to the firm and that can appear in its balance sheet. The most common ones are:
Bankers acceptance bills can be imagined as an instrument that functions like a post-dated cheque. The business which purchases a banker’s acceptance note can use this instrument to convert it into cash, with the bank guaranteeing the payment. The bank issues these cheques in exchange of a fee, i.e. issues it at a discount to a face value to the company.
Commercial Paper (CP) bought by a company refers to a short-term and unsecured debt instrument issued by other companies. The maturity of commercial papers can be as short as a few days to 270 days typically. Again, just like banker’s acceptance, commercial papers are issued at a discount on the face value.
Certificate of Deposits
Certificate of Deposits (CD) are issued by banks that provide interest on their value. Most financial institutions offer these certificates with a blocked period in which the certificate holder keeps the certificate untouched. The institution also levies a penalty in case of early withdrawal.
Treasury Bills (T bills) are similar to certificates of deposits, but are issued by governments with maturity of one year or less. They are usually issued in fixed denomination at a discount on the face value. They are considered as one of the safest forms of investment and the discount rate is referred to risk free rate of the country.
Marketable securities are important as they can be sold on short notice to meet the financial obligation of the firm (to pay salaries to employees, to pay bills to providers, etc.).
Relevance to the SimTrade certificate
This post deals with Marketable Securities on the balance sheet, an important tool for investors to take investment decisions.
- By taking the SimTrade course, you will know more about how investors can use various strategies to invest in order to trade in the market.
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
About the author
Article written by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).