A marketable security, often referred to simply as a marketable, is a financial instrument or investment that can be easily bought or sold in the secondary market, where investors trade securities among themselves. These securities are typically issued in the primary market, where the initial sale or issuance occurs, but their subsequent trading and exchange happen on various secondary markets. Marketable securities are highly liquid, meaning they can be quickly converted into cash without a significant loss in value. This liquidity makes them attractive to investors who want flexibility in managing their investments.
Key characteristics of marketable securities include:
- Liquidity: As mentioned, marketable securities are highly liquid, and investors can readily buy or sell them in the secondary market. This liquidity provides investors with the ability to adjust their investment portfolios as needed.
- Types: Marketable securities encompass a wide range of financial instruments, including stocks, bonds, money market instruments, and other short-term investments. They can offer different risk and return profiles, from low-risk options like Treasury bonds to higher-risk choices like stocks.
- Secondary Market: While these securities are initially issued in the primary market, their primary trading and exchange occur in the secondary market, where investors can buy or sell them on various stock exchanges or over-the-counter (OTC) markets.
- Risk Levels: Marketable securities offer various risk levels, and their value can fluctuate based on market conditions. Government bonds, such as Treasury bonds, are considered low-risk investments because they are typically backed by the government’s creditworthiness. In contrast, stocks are generally higher-risk investments because their value can be more volatile.
- Diversification: Investors often use marketable securities to diversify their investment portfolios. By holding a mix of different types of securities, they can spread risk and potentially enhance returns.
- Income Generation: Marketable securities can provide income to investors through dividends, interest payments, or capital gains. For example, bonds pay periodic interest, while stocks may offer dividends and capital appreciation.
Common examples of marketable securities include:
– Stocks: Represent ownership in a company and their value can fluctuate based on the company’s performance and market conditions.
– Bonds: Debt instruments issued by governments, corporations, or other entities. Bonds pay periodic interest to bondholders and return the principal at maturity.
– **Money Market Instruments: Short-term, highly liquid debt securities with maturities typically less than one year. These include Treasury bills and commercial paper.