Marketable securities are financial instruments that can be easily converted to cash due to their liquidity, low transaction costs, and high demand in the financial markets. These assets are designed to provide quick access to cash for investors while also offering opportunities for short-term profit. Companies, financial institutions, and individual investors often hold marketable securities to manage cash flows and take advantage of opportunities without being locked into long-term investments.
This article will explore the different types of marketable securities, breaking down each type’s key characteristics, risk levels, and examples to provide a comprehensive understanding of how they function in the financial market.
1. Stocks (Equities)
Stocks are shares of ownership in a company, giving shareholders a claim on part of the company’s assets and earnings. They are one of the most well-known and widely held marketable securities, traded on major exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. Stocks provide an opportunity for capital appreciation and can also offer dividends, making them attractive to investors seeking growth and income.
Stocks are divided into common stock and preferred stock. Common stock provides voting rights, while preferred stock offers priority in receiving dividends and claims in the event of liquidation but usually without voting rights.
Example: Apple Inc. (AAPL) is one of the most widely traded stocks on the NASDAQ. Investors who purchase AAPL shares become partial owners of the company, entitled to a portion of Apple’s profits (often through dividends) and to participate in any price appreciation of the shares. Apple’s high liquidity and constant demand make it a prime example of a marketable security.
Types of Stocks
- Common Stock: Provides voting rights and potential for capital gains; higher volatility than preferred stock.
- Preferred Stock: Priority over common stockholders for dividends and claims; generally has a fixed dividend.
Advantages of Stocks
- Liquidity: Easily bought and sold on stock exchanges, allowing investors to access cash when needed.
- Potential for High Returns: Stocks can appreciate significantly over time.
- Dividends: Some stocks pay regular dividends, providing a steady income stream.
2. Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital. By purchasing corporate bonds, investors essentially lend money to the company in exchange for regular interest payments, known as coupon payments, until the bond matures. At maturity, the company repays the principal amount to the bondholder. Corporate bonds are considered marketable securities because they are traded on bond markets, allowing investors to buy and sell them relatively easily.
Corporate bonds are generally less risky than stocks but may carry a risk level that depends on the company’s financial health. Bonds issued by financially stable companies with high credit ratings are safer, while those from riskier companies (known as high-yield or “junk” bonds) offer higher interest rates to compensate for the increased risk.
Example: Suppose a company, XYZ Corporation, issues bonds with a 5% annual coupon rate and a maturity period of 10 years. Investors who purchase XYZ bonds receive 5% interest annually and, after 10 years, the full principal amount. If investors need liquidity, they can sell these bonds on the bond market before maturity.
Types of Corporate Bonds
- Investment-Grade Bonds: Issued by companies with high credit ratings, offering lower risk and lower interest rates.
- High-Yield Bonds (Junk Bonds): Issued by companies with lower credit ratings, offering higher interest rates to compensate for higher risk.
Advantages of Corporate Bonds
- Fixed Income: Bonds provide regular interest payments, making them appealing for income-seeking investors.
- Lower Risk than Stocks: Bonds are generally less volatile than stocks, making them a safer investment for conservative investors.
- Tradeability: Corporate bonds can be traded on bond markets, offering liquidity if investors need cash.
3. Government Bonds
Government bonds are debt securities issued by national governments to finance projects or manage debt. They are considered one of the safest types of marketable securities, especially those issued by stable governments such as the United States. U.S. government bonds are traded on bond markets, making them highly liquid.
Government bonds vary in maturity terms, including short-term Treasury bills (T-bills), medium-term Treasury notes (T-notes), and long-term Treasury bonds (T-bonds). They offer periodic interest payments and are backed by the government’s credit, making them low-risk investments suitable for conservative investors.
Example: The U.S. Treasury issues 10-year Treasury notes that pay interest semi-annually. These T-notes are widely traded on the secondary market and are considered a benchmark for low-risk investment. Investors can sell these T-notes anytime, making them liquid assets.
Types of Government Bonds
- Treasury Bills (T-Bills): Short-term securities with maturities of up to one year.
- Treasury Notes (T-Notes): Medium-term securities with maturities between two and 10 years.
- Treasury Bonds (T-Bonds): Long-term securities with maturities exceeding 10 years.
Advantages of Government Bonds
- Low Risk: Backed by the government’s credit, making them one of the safest investments.
- Predictable Income: Fixed interest payments offer a steady income.
- High Liquidity: Government bonds are highly liquid, especially T-bills and T-notes, and can be sold on secondary markets.
4. Municipal Bonds
Municipal bonds, or “munis,” are debt securities issued by local governments, such as cities, states, or counties, to finance public projects like schools, highways, and hospitals. Like other bonds, municipal bonds provide periodic interest payments and return the principal at maturity. Municipal bonds can be tax-exempt, meaning the interest earned is often exempt from federal income tax, and sometimes from state or local taxes as well, making them attractive for high-net-worth investors.
Municipal bonds are marketable securities because they are traded on bond markets and can be bought or sold before maturity. However, their liquidity may vary based on the issuer’s credit quality and the bond’s specific terms.
Example: A city issues municipal bonds to fund a new public hospital. These bonds offer a 3% tax-exempt interest rate. High-income investors are attracted to these bonds because the tax exemption enhances their returns. If investors need liquidity, they can sell the municipal bonds on the bond market before maturity.
Types of Municipal Bonds
- General Obligation Bonds: Backed by the issuing government’s general credit and taxing power.
- Revenue Bonds: Backed by revenue generated from the specific project funded by the bond, such as a toll bridge or stadium.
Advantages of Municipal Bonds
- Tax Benefits: Often exempt from federal taxes and, in some cases, state or local taxes.
- Lower Risk: Generally safer than corporate bonds, especially general obligation bonds.
- Liquidity: Can be traded on bond markets, allowing for flexibility if investors need cash.
5. Money Market Instruments
Money market instruments are short-term debt securities with high liquidity and low risk. They include Treasury bills, certificates of deposit (CDs), and commercial paper. Money market instruments are typically used by institutions and governments to meet short-term funding needs, and they offer returns through interest payments. They are considered very safe investments, making them suitable for risk-averse investors or those needing quick access to cash.
These instruments are traded on the money markets, which are a part of the broader financial market focused on short-term debt. The maturity period for money market instruments is typically less than a year, and they are highly liquid, allowing investors to convert them to cash when necessary.
Example: A corporation issues commercial paper, a form of unsecured promissory note, to meet short-term cash flow needs. The commercial paper matures in 90 days and offers a fixed interest rate. Investors who buy the commercial paper are lending to the corporation and can sell it on the money market if they need liquidity before maturity.
Types of Money Market Instruments
- Treasury Bills (T-Bills): Short-term government securities with maturities of up to one year.
- Certificates of Deposit (CDs): Time deposits offered by banks with a fixed interest rate and maturity date.
- Commercial Paper: Unsecured, short-term debt issued by corporations to cover immediate needs.
Advantages of Money Market Instruments
- High Liquidity: Easy to convert to cash due to their short maturity periods.
- Low Risk: Generally safer than long-term investments, especially government-issued instruments.
- Fixed Interest Rates: Provide predictable returns over short periods.
6. Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are a type of investment fund that holds a basket of securities and is traded on exchanges like a stock. ETFs can include stocks, bonds, or other securities, and they offer investors an easy way to gain exposure to various asset classes. Unlike mutual funds, ETFs are highly liquid and can be bought or sold throughout the trading day.
ETFs are marketable securities because they can be quickly converted to cash by selling them on the stock exchange. They are commonly used by investors to diversify their portfolios, hedge risks, or target specific sectors or indices. ETFs can track broad market indices, sectors, or asset types, providing a flexible investment vehicle.
Example: The SPDR S&P 500 ETF (SPY) is an ETF that tracks the S&P 500 index. By purchasing SPY, investors gain exposure to the performance of the 500 largest companies in the U.S. stock market. Because it trades on the stock exchange, SPY can be sold at any time, providing high liquidity.
Types of ETFs
- Index ETFs: Track specific indices, such as the S&P 500 or NASDAQ-100.
- Sector ETFs: Focus on specific sectors, such as technology or healthcare.
- Bond ETFs: Hold a diversified portfolio of bonds, providing fixed-income exposure.
Advantages of ETFs
- Diversification: Provides access to a broad range of assets in a single trade.
- Liquidity: Highly liquid, as they are traded on stock exchanges.
- Cost-Effectiveness: Often has lower fees than mutual funds due to their passive management style.
7. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. REITs allow individual investors to invest in large-scale properties, such as shopping malls, office buildings, and hotels, without directly buying the properties themselves. Most REITs are publicly traded on stock exchanges, making them marketable securities that can be bought or sold easily.
REITs typically pay high dividends because they are required by law to distribute most of their taxable income to shareholders. They are popular among income-focused investors looking for exposure to the real estate market without the challenges of direct property ownership.
Example: A retail REIT like Simon Property Group (SPG) owns and operates shopping malls and retail centers across the U.S. Investors in SPG receive dividends based on the rental income generated from these properties. The REIT is traded on the NYSE, making it easy for investors to buy or sell shares.
Types of REITs
- Equity REITs: Own and operate income-producing real estate, earning revenue from rental income.
- Mortgage REITs (mREITs): Provide financing for income-producing real estate by purchasing or originating mortgages.
- Hybrid REITs: Combine both equity and mortgage REITs, holding properties and financing.
Advantages of REITs
- High Dividends: Distribute a significant portion of income, making them attractive for income investors.
- Liquidity: Publicly traded REITs can be easily bought or sold on exchanges.
- Diversification: Provides exposure to the real estate market without requiring direct ownership of properties.
Conclusion
Marketable securities play an essential role in financial portfolios by offering liquidity, low transaction costs, and potential for short-term profits. From stocks and bonds to ETFs and REITs, each type of marketable security offers unique benefits and caters to various investment goals and risk appetites. Whether for growth, income, or liquidity, these securities provide flexible options for investors to tailor their portfolios to meet specific financial objectives.
