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Marketable Securities, Investment Securities Assets
Definition, Meaning Explained, and Examples

 

When companies invest in securities issued by other companies, the investment assets are classified as either marketable securities or Investment securities.

Companies invest in securities issued by other companies, in order to "make the best use" of their liquid assets.

What are Marketable Securities and Investment Securities Assets?

Many companies own securities issued by other companies, such as stock shares (equity) or bonds (debt). Such securities are added to the company's asset base, usually under the direction of senior financial officers or the Board of Directors. For accounting purposes (valuing and reporting), these securities are typically classified as either Marketable securities or Investment securities.

Marketable Securities

Marketable securities is the accounting term for securities purchased and held, which the company expects to convert into cash in the near term. Marketable securities are carried on the Balance Sheet as current assets, often in an account called Short term investments.

Investment Securities

Investment securities are securities which the company intends to hold either for the long term (more than a year) or for an indefinite period (e.g., until market conditions justify selling, or until the company achieves control objectives with the company that issued the securities).

Marketable and investment securities may include, for instance, corporate and government bonds, treasuries, and stock shares, as well as derivative instruments such as options or swaps.

Investments for Companies Outisde the Investment Industry

Note that the investment discussion below refers to companies whose primary line of business is something other than financial investment. This discussion below, in other words, does not apply to holding companies, lending companies, investment companies, or companies that specialize in start up / entrepreneurial funding.

 

Contents

Related Topics

 

Objectives for Security Investments
Why Do Companies Buy and Hold Securities?

The highest level business objective for profit-making companies is often quoted simply as "To increase owner value." Companies pursue this objective by using assets to earn profits, which increase owner value in two ways:

  • Profits can be paid directly to shareholder owners as dividends.
  • Profits can be kept as retained earnings, thereby increasing owners equity.

The highest level objective for a company's senior financial officers can also be phrased in simple terms, such as "To make the best use of the company's assets." in this regard, the officer's responsibilities for asset use are, in this order:

  1. To sustain normal operations and meet short-term obligation needs, e.g., paying employee salaries and wages, or covering financing costs on loans.
  2. To make prudent investments that enable long-term survival and growth, e.g., investments in physical infrastructure, product research and development, marketing initiatives, or pursuit of other strategic objectives.

    Pursuit of "other strategic objects" could, for instance, involve purchase of a controlling interest in a competitor or supplier.
  3. To invest proactively when the company has more than enough assets available to support responsibilities (1) and (2) above, e.g., when there is abundant surplus "Cash on hand."

    In such cases, the responsibility is to put such surplus assets to work so as to bring the greatest possible returns. The alternative—letting cash that is truly surplus lie idle when it could be earning—is usually viewed as irresponsible financial practice.

Responsibilities (2) and (3) above may include a very wide range of actions, including buying stock shares or bonds from companies in completely different industries, buying bank certificates of deposit, or even investing in actions that contribute to "employee satisfaction" or "community good will."

What Are Primary Classes of Securities Holdings?

Accountants classify most securities investments either as Investments in securities or marketable securities. In order for an investment asset to qualify as a marketable securities, both of the following conditions must:

  1. There must be an accessible, active market for the securities. If so, the securities can be considered liquid assets with a reliably assessed market value. 
  2. The company is able to sell the securities when cash needs require it to do so, or if financial officer believe there is financial advantage in selling.

Absent either (1) or (2), financial auditors will assume:

  • The securities were purchased for long term objectives, and they should be reported as long term assets.
  • Securities are simply called Investments in Securities assets, not marketable securities.

For accounting purposes, Investment securities are further designated in 3 classes and Marketable securites in 4 classes, as shown in Exhibit 1 below.

For detailed examples showing valuing and reporting methods for each class, see the Encyclopedia article Lower of Cost or Market Rule.

Securities Assets Kind of securities Class definition
Investments in Securities
Minority, passive investment Equity Company A owns less than 50% of the voting stock in Company B, and Company A does not attempt or intend to attempt to use its ownership to influence or control actions or decisions of company B. In this case, A is said to have a minority passive investment interest in B. In practice, however, the minority/passive designation is applied only when one company owns 20% or less of another. There is a presumption that 20% ownership or greater implies an "active" interest.
Minority, active investment Equity The classification minority active investment usually applies to companies owning between 20% and 50% of the voting stock in another company, and which do attempt to use this ownership to influence or control that company.
Majority, active investment Equity When company A owns more than 50% of Company B, A is in a position to exercise absolute control over B. In such cases, A is said to have a majority active interest in B. A is called the parent company, and B is a subsidiary of A.
Marketable securities
Trading securities Equity or debt Securities assumed to be held for relatively short term gains are called trading securities. It is assumed that securities in this class will be actively traded.
Available for trading Equity or debt Securities which may or may not be held for long term gains are designated available for trading. Marketable securities in this class are typically acquired and held for a while to meet a specific cash need (e.g., to retire bonds the company has issued that will be coming due).
Debt held to maturity Debt Debt securities (e.g., bonds) which the company has both the intent and ability to hold to maturity, and  firm has both the positive intent & to hold to maturity.
Derivatives with available
  market
Derivative Options, swaps, or futures, held by the company either as insurance or intended as profit making investments in their own right. If there is an open, accessible market for the derivatives, they may be called marketable securities
Other Securities
Derivatives, negotiated
purchase
Derivative Derivatives which are acquired through private negotiated contract, which are not traded on an open market, are classified as securities investments, but not classified as marketable securities.
Exhibit 1. The classification of securities assets for accounting purposes includes Investment securities (3 classes) and Marketable securities (4 classes). For detailed coverage of methods used for valuing and reporting each class, see the Encyclopedia article Lower of Cost or Market Rule.

Example Balance Sheet
Securities Under Current & Long Term Assets

Securities assets are carried on the Balance sheet as assets. The Exhibit 2 sample balance sheet below highlights these assets in bold green.

On the Balance sheet, Marketable securities belong to Current assets, under a category named something like "Short term investments. " Securities that the firm holds for longer or indefinite periods appear Long term investments and funds. In Exhibit 2, for instance, these securities appear as holdings of stock shares and bonds.

Grande Corporation                                   Figures in $1,000's
Balance Sheet at 31 December 20YY   
ASSETS
Current Assets
   Cash
   Short term investments
   Accounts Receivable
      Less allowance doubtful accts
      Net accounts receivable
   Notes receivable short term
   Inventories
      Raw materials
      Work in progress
      Finished goods/merchandise
      Operating & office supplies
            Total Inventories
   Prepaid exp, insurance, def taxes
          Total Current Assets




1,969
   137



    611
1,692
3,664
      19


1,369
  137


1,832
     20





5,986
  265
















9,609
Long Term Investments and Funds
   Common stock held
   Preferred stock held
   Bonds Held / Sinking funds
   Other Long Term Investments
          Total Long Term Investments
    
  493
  184
  364
  419





1,460
Property, Plant & Equipment
   Factory Manufacturing Equipment
      Less accumulated depreciation
      Net factory mfr equipment
   Store Equip / Selling Assets
      Less accumulated depreciation
      Net store/selling equipment
   Computer systems
      Less accumulated depreciation
      Net computer systems
           Total Property, Plant & Equip
 
5,983
 2,782

5,456
 1,292

4,721
 2,370




3,201

4,164


  2,351










9,716
Intangible Assets
   Copyrights
   Trademarks and Patents
   Goodwill
          Total Intangible Assets
    
1,014
108
  100




1,460
Other Assets
                    Total Assets
         68
22,075
LIABILITIES
Current Liabilities
   Accounts payable
   Notes payable, short term
   Current portion of long term debt
   Accrued expenses, Interest payable
   Unearned revenues
   Taxes payable Other withholding
          Total Current Liabilities



 1,642
    912
    349
     146
     274
    141








3,464
Long Term Liabilities
   Bank notes payable
   Bonds payable, other LT liabilities
          Total Long Term Liabilities
                    Total Liabilities
     
912
 4,562



 5,474
8938
OWNERS EQUITY
Contributed Capital
   Preferred stock
   Common stock
   Contributed capital excess of par
          Total Contributed Capital

Retained Earnings
          Total Owners Equity


3,798
4,184
 1,457





9,439

 3,698








13,137
          Total Liabilities and Equities
    22,075
 

Exhibit 2. Balance securities holdings in bold green under Current Assets and Long Term assets.

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