Marketable securities are investments that can easily be bought, sold or traded on public exchanges. The high liquidity of marketable securities makes them very popular among individual and institutional investors. These types of investments can be debt securities or equity securities.
Types of Marketable Securities
Though there are numerous types of marketable securities, the most common types of equity and debt securities are, relatively, stocks and bonds.
Stocks
Stock represents an equity investment because shareholders maintain partial ownership in the company in which they have invested. The company can use shareholder investment as equity capital to fund the company’s operations and expansion.
In return, the shareholder receives voting rights and periodic dividends based on the company’s profitability. The value of a company’s stock can fluctuate wildly depending on the industry and the individual business in question, and so investing in the stock market can be a risky move. However, many people make a very good living investing in equities, using short- and long-term strategies.
Bonds
Bonds are the most common form of marketable debt security and are a useful source of capital to businesses that are looking to grow. A bond is a security issued by a company or government that allows it to borrow money from investors. Much a like a bank loan, a bond guarantees a fixed rate of return, called the coupon rate, in exchange for use of the invested funds.
The face value of the bond is its par value. Each issued bond has a specified par value, coupon rate and maturity date. The maturity date is when the issuing entity must repay the full par value of the bond.
Because bonds are traded on the open market, they can be purchased for less than par (referred to as the discount) or for more than par (also called the premium), depending on their current market values. Coupon payments are based on the par value of the bond rather than its market value or purchase price, and so an investor who can purchase a bond at a discount still enjoys the same interest payments as an investor who purchases the security at par value.
Interest payments on discounted bonds represent a higher return on investment than the stated coupon rate. Conversely, the return on investment for bonds purchased at a premium is lower than the coupon rate.
Preference Shares
There is another type of marketable security that has some of the qualities of both equity and debt. Preference shares, also called preferred shares, have the benefit of a fixed dividend, much like a bond.
Unlike a bond, however, the shareholder’s initial investment is never repaid, making it a hybrid security. In addition to the fixed dividend, preferred shareholders are granted a higher claim on funds than their common counterparts if the issuing company goes bankrupt and must liquidate assets to pay off its liabilities.
In exchange, preferred shareholders give up the voting rights that ordinary shareholders enjoy. The guaranteed dividend and insolvency safety net make preference shares a more enticing investment to those who find the common stock market too risky but don’t want to wait around for bonds to mature.
Indirect Investments
Marketable securities can also come in the form of money market instruments, derivatives and indirect investments. Each of these types contains several different specific securities.
Indirect investments include hedge funds and unit t…