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Marketable Securities | Definition | Types | Features - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo friends today we are
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learn a concept concept which is known
as marketable securities on the balance
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sheet and we are gonna understand the
some of the top examples as we move down
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there's a extract taken and there is a
thing mentioned over here the marketable
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securities is nothing but a financial
instrument that can be bought or sold
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easily so to buy and sell you can do in
a very quick fashion this securities are
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very important investment class and are
favorites of the major corporates the
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blue chip companies the Microsoft has
more than 50% of its total assets as the
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short-term investments of the marketable
securities now the question over here is
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why 50% my goodness look at see the
number here the $193,694 is the total
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assets and of that 106,730 it just
falls in the short-term securities so
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that's a big number
in itself here that is in the current
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assets part let's understand why
Microsoft is doing this there must be
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some reason behind this they must be
having some logic let's understand that
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now what are the marketable securities
are as the first and the foremost thing
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that we need to understand marketable
securities as we understood is the
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financial instrument that can be easily
bought and sold on the stock exchange
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with the short period of time so in
order to understand the definition we
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first need to understand one important
term in the above definition what we
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just what I just coded is the financial
instrument part so the financial
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instrument basically represents a legal
obligation to pay or receive any
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monetary value so financial instruments
are the assets that can be exchanged or
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traded second some of the you know
common types of financial instruments
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are like you know equity shares we have
preference shares debts derivatives so
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the securities are the part of the
financial instruments and all the
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marketable securities are the finance
instrument but all financial students
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are not marketable securities remember
that now what are some of the features
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of the or you can see the traits of
marketable securities
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well there are many features of this
security but the two most important ones
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that set them apart from the rest are as
follow the marketable securities on the
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balance sheet they are highly liquid
okay this is perhaps the single most
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important feature that every financial
instrument must have in order to
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classify them as the marketable
securities so the securities they are
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highly liquid and can be easily be
converted into cash within a very short
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time span and at a reasonable price
what amounts to the short time has not
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defined any way but as for the
conventional conventions and the
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generally accepted principles the
duration should be closely to less than
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one year now some of the examples of the
instruments who exhibits features and
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hence it is classified as marketable
securities are like commercial paper CP
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the Treasury bills the bills receivable
and other short term instruments right
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now second important feature is that
marketable security are easily
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transferable now in order to be liquid
the security should be easily be
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transferable and highly liquid okay and
easily transfer feature of the
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securities are complementary to each
other so such securities are instrument
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that can be easily be transferable on
the stock exchange some other exchanges
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where this are twin traded so the above
to feature the transferable and highly
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liquid is used to classify any security
as the marketable security now let's
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understand how this is used as the
classification tool with the help of the
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practical illustration let's say there
is this company X which invests in US
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Treasury invests in US Treasury bonds
having a maturity let's say standing at
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30 years in the financially or 2016 okay
the company's Financial Controller let's
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say mr. Adam is the is he's basically
the dilemma the as to whether those
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investments are to be classified as
securities or not so what we discussed
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based on that the classification of the
securities as marketable securities has
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to be judged based on two important
factors what we learn highly liquid and
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easily transferable so classification of
such securities are not based on the
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time duration for which it is held by
the investor so the marketable
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securities on the balance sheet can be
long term or it can be short term right
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it can we do think long term or short
term so the government securities
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generally have common security generally
have a long term you can see they have
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long term duration like for example the
US Treasury maturity can be highly can
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be as high as 30 years and as low as 28
days so you cannot judge based on that
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government security are one of the most
preferred mode of investments used by
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many Fortune 500 companies even though
the Securities don't promise to return
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the principal back to the investor for
30 years they can be sold relatively
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quickly in the bond market and hence
they are highly liquid and easily
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transferable so thus they are classified
as the marketable securities right the
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third feature is that the third thing is
that the lower return on marketable
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securities so return of the security is
directly proportional to the risk
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associated with higher the risk that
means higher the return now since the
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securities are highly liquid and easily
transferable inflation and default risk
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associated with them are very low
inflation and the other one is the
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default risk they are very low so
because of that associated with them
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they are very low in comparison
what type of other securities so
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investor has to make a trade off this is
a very important word trade-off between
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the risk and the returns when choosing
them that this the securities right so
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different types of you know risk that
are associated are something like this
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the first one is the default risk now
the default risk is the probability that
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the issuer or the borrower
will be able to make payment on the on
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the debt obligation on the due dates the
second is the interest rate risk rate so
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interest rate risk is the risk
associated with the fixed return
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instruments like bonds debentures whose
value decreases on account of rising in
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the interest rate third is the inflation
risk now unlike other risk that affects
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only the fixed income instruments like
the interest rate risk inflation risk
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affects all the type of securities
because you know it affects every economy
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its effect is seen more in high
inflationary economy where price level
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of the commodity rises drastically every
year and the rises in the price level
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reduces the value of the money and
decreases the value of the money results
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in decrease in the return on the assets
now the fourth part the marketable
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marketability of this securities now
marketability securities marketable
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securities have an active market place
where it can be bought and sold like you
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know the London Stock Exchange then NYSE that is a New York Stock
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Exchange and so on and so forth so
marketability marketability is similar
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to liquidity except that you know the
liquidity means that the timeframe
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within which the security can be
converted into cash where the
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marketability implies at each you know
it implies the ease with the securities
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can be bought and sold so on the
concluding in all the above features and
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it one of the marketable securities on
the balance sheet have made them quite
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popular means of finance instrument
almost every company holds some amount
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of marketable
the specific reason for holding that
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depends on greatly on the solvency and
the financial condition of the company
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despite many advantages you know there
are some limitations never like low
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returns default risk inflation risk I
showed it with the idea they are
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connected with the marketable securities
so marketable securities are held by the
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company for our trading purpose or
liquidity purpose the generally this are
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held up to the maturity period but the
company may sell them prior to the
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stated maturity for some strategy
reasons including like you know but not
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limited to anticipation of credit
detoriation or duration management thank
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you everyone for joining the session
Cheers
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