A marketable security is an easily traded investment that is readily converted into cash, usually because there is a strong secondary market for the security. Such securities are typically traded on a public exchange, where price quotes are readily available. The tradeoff for the high level of liquidity is that the return on marketable securities is usually low.
Marketable securities are recorded as a current asset, since they have a maturity of less than one year. This is of some importance when calculating the current ratio, since marketable securities are included in the numerator of that calculation, and make a business look more liquid.
Examples of marketable securities are:
- Banker's acceptances
- Certificates of deposit
- Commercial paper
- Treasury bills
A conservatively-run business may place a large proportion of its excess cash in marketable securities, so that it can easily liquidate them if there is a sudden need for cash. A tightly-managed treasury department that has a clear understanding of expected cash flows may pursue higher-return investments which typically require longer maturities, and so will invest a smaller proportion of excess cash in marketable securities.