Definition
The financial accounting term marketable security is used to describe both debt and equity securities held by a company. Marketable securities is a subset of short term investments, as such it appears on the company's balance sheet as a current asset.
Explanation
Marketable securities are temporary investments one company might make in another company, with the hope of providing higher returns to its shareholders. There are two basic types of marketable securities:
- Marketable Equity Securities: common or preferred stock investments held by a company in another large corporation. Since there is an active market for such marketable equity securities, they are considered liquid investments; nearly as liquid as cash. Until these securities are sold, they are usually valued at the lower of cost or market.
- If the investment in equity securities is for purposes of controlling that company, those securities are not considered marketable equity securities; rather they are considered long term investments.
- Marketable Debt Securities: short term bonds held by one company in another large corporation. These debt securities are held by companies as an alternative to cash, and there should be an active market to ensure liquidity of the investment. Marketable debt securities should be carried at cost, until a gain or loss is realized at sale.
- These debt securities should be held as short term investments, meaning longer than twelve months; otherwise this asset belongs in the category of long term investments.
