Takeaways
- Stocks, bonds, and ETFs are three commonly held marketable securities.
- Marketable securities have a maturity period of one year or less.
- Marketable securities are bought and sold on public stock or bond exchanges.
- Marketable securities are less risky because they can be converted into cash quickly.
- Companies purchase marketable securities to help manage cash flow and short-term investments.
What Are Marketable Securities?
Marketable securities are a type of financial instrument that is easily tradable in secondary markets. Marketable securities are typically characterized by their liquidity and help provide investors with flexibility by being able to buy or sell them on the open market. Marketable securities are a group of specific assets that can be converted into cash rapidly without diminishing their market value. This makes them highly attractive investment opportunities because investors can earn interest or appreciation while maintaining flexibility.
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Marketable securities have a maturity of one year or less, can be bought and sold on an exchange (stock or bond), and have high liquidity. A clear understanding of marketable securities and how they function is critical information for investors looking to craft a well-balanced portfolio that remains dynamic.
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3 Popular Types of Marketable Securities
The three primary types of marketable securities are common stock, ETFs, and bonds. Each has unique traits that make it suitable for mitigating risk in a portfolio.
Common Stocks
When people think about trading stocks and the stock market like the NASDAQ or NYSE, they are visualizing trading common stocks. Common stock is a type of marketable security that is a piece of ownership in a company. When you buy common stock, you are a “shareholder” of that company. A share gives you the potential to benefit from increasing your net worth through capital appreciation or dividend payments.
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Stock investors will also usually have voting rights, which allow them to participate in vital company decisions during shareholder meetings. This could be the right to vote on a board of directors or merger or acquisition decisions. The value of common stocks changes based on macroeconomic conditions, industry risk, and company performance.
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Exchange-Traded Funds (ETFs)
ETFs, or exchange-traded funds, are a newer and popular form of marketable security [1]. ETFs are special investment funds that are traded on exchanges just like stocks. However, ETFs offer greater diversification because each fund holds a collection of assets, and as an investor in the EFT, you buy a share of the ETF. Exchange-traded funds can focus on investing in different asset classes but concentrate focus on stocks, bonds, or commodities.
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ETFs provide investors the flexibility of trading on the open market while having the diversification and risk management that other assets do not offer. ETFs usually cover a specific asset class, industrial sector, or type of business.
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For example, you can find ETFs focused exclusively on artificial intelligence companies, healthcare organizations, microchips, or gasoline. Since leading fund managers create ETFs, they can offer better returns than individual stocks with low transaction fees and broader market exposure.
Bonds
Investing in bonds ebbs and flows based on interest rates. More recently, bonds have soared in popularity due to rising interest rates and inflation. Unlike stocks, bonds represent debt ownership rather than equity ownership.
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When you buy a bond, you are making a loan to the bond issuer in exchange for periodic interest payments and the return of the principal amount when the bond matures. Many companies and government entities issue bonds to help raise debt capital and finance projects, new product launches, or company expansion plans. Because bonds pay interest, they are popular among fixed-income investors, such as people nearing retirement.
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Advantage of Marketable Securities
Investing in marketable securities comes with some significant advantages that appeal to a wide range of investors. The most cited advantage is liquidity. This liquidity means you can trade your stock, bond, or ETF investment and quickly convert it into cash. This flexibility allows you to plan your cash flow needs or respond to changing market conditions.
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Diversification is another massive benefit. Not only do individual investments into marketable securities like stocks and bonds help diversify your portfolio, but because they are short-term (one year or less) you can use these investments to expose your portfolio to these short-term investments while augmenting for long-term exposure through U.S. bonds or notes. This means they can reduce the impact of poor performance and make your investments more stable over time.
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Additionally, marketable securities tend to offer competitive returns. Bonds provide fixed income, and stocks have the potential for capital appreciation. ETFs bring a collection of assets to a single ticker, letting you diversify with a single transaction.
Disadvantage of Marketable Securities
Even though marketable securities offer significant advantages, they do have drawbacks. One of the biggest disadvantages is that they are all vulnerable to market volatility, which can pose a risk of short-term losses.
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That same volatility can diminish the liquidity of those same assets, making it challenging to sell at desired prices. Finally, some marketable securities, like options or derivatives, are far too complex for the average investor to simply understand without more education [2].
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Smart Summary
Investing is about building a well-rounded and diversified investment portfolio. Most financial advisors will tell you marketable securities should have a place in your portfolio. This means analyzing the investment you are selecting, its time horizon, your risk appetite, and how you are optimizing your portfolio. Regularly monitoring investments can be mentally taxing, which is why automating your finances or using a robo-advisor to help you manage your portfolio can relieve financial stress and boost investment returns.
(1) U.S. Securities and Exchange Commission. Exchange-Traded Funds (ETFs). Last Accessed January 24, 2024.
(2) U.S. Securities and Exchange Commission. Derivatives. Last Accessed January 24, 2024.
