If you’re new to investing or just looking for ways to keep your cash flowing in a safe, liquid manner, marketable securities might be something you want to explore. These nifty little investments aren’t as flashy as some big tech stocks or the latest cryptocurrency, but they serve an important purpose. Let’s break down what marketable securities are, how they work, and explore a few real-life examples that’ll help you understand their value.
What Are Marketable Securities?
To put it simply, marketable securities are investments that are easily tradable on public exchanges or can be quickly converted into cash. Think of them like the liquid assets in your investment portfolio. They’re low-risk and can be sold fast without losing their value.
You may have heard these referred to as short-term investments, and that’s pretty much their game. These assets typically mature within a year. Companies often use them to manage their excess cash reserves in a safe and flexible way. So, if you’re a business or an individual investor looking to park your money somewhere until you find a more exciting investment, marketable securities are your best friend.
Key Characteristics of Marketable Securities:
· High Liquidity: These can be easily converted into cash without much hassle.
· Short-Term: Most marketable securities mature within a year.
· Publicly Traded: Many of them are listed on exchanges, making them accessible to anyone.
· Low Risk: You’re not dealing with crazy swings in value like with stocks or crypto.
Now that you have a solid foundation, let’s dive deeper into the different types of marketable securities.
Different Types of Marketable Securities
1. Stocks (Equity Securities)
Stocks are a classic example of marketable securities. Companies like Apple, Google, and Microsoft issue shares of stock, which are traded on exchanges like the New York Stock Exchange (NYSE) or NASDAQ. If you own a stock, you’re essentially owning a tiny slice of the company.
For example, Apple Inc. has a massive market capitalization that fluctuates daily based on stock prices. In 2020, Apple’s stock price reached an all-time high of $137.87 per share. Investors could easily buy and sell their shares, making it a great option for liquidity.
2. Bonds (Debt Securities)
Bonds are another type of marketable security. When a company or government issues bonds, they’re borrowing money from investors and agreeing to pay it back with interest. Common examples include Treasury Bills (T-Bills) issued by governments or corporate bonds issued by companies.
Let’s take the U.S. 10-year Treasury bond, for instance. As of 2021, it’s been yielding an average return of about 1.5%. Though the return might not be jaw-dropping, it’s reliable and low-risk, making it a favorite among conservative investors looking for marketable securities.
3. Money Market Instruments
These are ultra-short-term securities, such as commercial paper or certificates of deposit (CDs). These investments are typically issued by corporations or banks and are considered one of the safest options available.
For example, a certificate of deposit might offer a 2% interest rate for a 6-month term, providing a nice, safe option for those looking to park cash temporarily. But because they have shorter maturities, they’re incredibly liquid, making them prime examples of marketable securities.
Why Do Companies and Investors Use Marketable Securities?
Both companies and individual investors love marketable securities. Here’s why:
For Companies:
· Cash Management: Businesses use marketable securities to manage excess cash and ensure they have enough liquidity for their operations.
· Low Risk, Steady Returns: They want a safe place to park funds that aren’t needed immediately, and marketable securities offer a low-risk way to earn a little bit of return.
For instance, Apple Inc. holds over $200 billion in cash reserves as of 2020, a significant chunk of which is tied up in marketable securities. This allows them to stay agile, meeting operational needs without taking on too much risk.
For Investors:
· Short-Term Parking for Cash: Investors use marketable securities to store cash temporarily until they find a more long-term investment option.
· Liquidity: These assets can be sold quickly if the investor needs the funds immediately.
· Risk Reduction: While not a get-rich-quick investment, marketable securities are much safer compared to stocks or speculative investments.
The Benefits and Risks:
· Benefits: Low risk, easy to liquidate, and provide a steady, if modest, return.
· Risks: Some marketable securities can still be affected by market volatility, and returns are typically lower than other investment types like stocks or crypto.
Real-World Examples of Marketable Securities
Example 1: Treasury Bills (T-Bills)
T-Bills are short-term debt securities issued by the U.S. government. They’re considered one of the safest investments out there. For instance, in 2020, the U.S. government issued $85 billion in 3-month T-bills, offering an interest rate of around 0.1%. Investors flocked to T-Bills during uncertain times because they’re backed by the U.S. government.
Example 2: Commercial Paper
Microsoft frequently issues commercial paper for its short-term funding needs. In 2020, Microsoft issued $8 billion in commercial paper to fund its operations. These short-term, unsecured promissory notes are usually sold at a discount, providing the buyer with a modest return.
Example 3: Money Market Funds
Many investors look to money market funds for a safe haven. These funds invest in short-term debt instruments like T-Bills, CDs, and commercial paper. For example, in 2019, the Vanguard Prime Money Market Fund returned around 2.3%. Money market funds are easy to access and provide a safe, low-risk alternative to more volatile investments.
Case Studies: Real-Life Companies Using Marketable Securities
Case Study 1: Apple’s Huge Cash Reserves
As mentioned earlier, Apple holds over $200 billion in cash reserves. While a large portion of that is used for operations, a significant portion is tied up in marketable securities. This allows Apple to weather economic downturns without needing to tap into their primary business funds.
Case Study 2: Tesla’s Strategic Use of Marketable Securities
Tesla Inc. held over $20 billion in marketable securities as of 2021. Tesla’s management uses this to ensure they have enough liquidity for expansion and innovation. They’ve famously kept cash on hand to hedge against supply chain disruptions or unforeseen financial challenges, giving them flexibility in a rapidly changing market.
Case Study 3: General Electric’s Short-Term Investments
General Electric (GE) has long used marketable securities for its short-term investments. For instance, GE issued $1 billion in short-term debt securities in 2017 to finance its operations. The company has consistently used marketable securities to maintain liquidity and reduce risk.
The Future of Marketable Securities
With the rise of digital finance, the future of marketable securities might evolve. Cryptocurrencies and blockchain technologies are changing the way we think about liquidity and investment.
For example, in 2021, the El Salvador government announced that it would hold Bitcoin as part of its national reserves, blurring the lines between traditional marketable securities and newer digital assets. These digital innovations could become more mainstream as financial markets evolve, making marketable securities even more accessible to a wider range of investors.
Conclusion: Should You Invest in Marketable Securities?
Marketable securities are a reliable, low-risk option for managing short-term cash reserves. Whether you’re an individual investor looking for a safe place to park your money or a company managing large cash reserves, these securities offer flexibility and liquidity.
Though the returns might not be as high as those from stocks or cryptocurrencies, marketable securities provide peace of mind and a stable source of income. As we’ve seen with companies like Apple, Microsoft, and Tesla, they are an essential part of any well-rounded investment strategy.
So, if you’re looking for a way to keep your investments liquid and risk-free, it might be time to take a closer look at marketable securities.