Definition of Marketable Securities
Marketable securities are equity or debt instruments listed on an exchange that can easily be purchased or sold. Equities are stocks in publicly held companies. Debt instruments are bonds such as corporate bonds and municipal bonds. Treasury securities, options, unit investment trusts, commodities, derivatives and mutual funds are also considered liquid assets and marketable securities. Their current value can easily be ascertained by examining recent market transactions. The cost basis or acquisition cost of a marketable security is the cost of the security including commissions and fees paid when bought or sold. The price of non-marketable securities may not be easily found in the secondary market. Examples of non-marketable securities include savings bonds and restricted stock.
Advantages of Debt Securities
Companies, municipalities and governments issue debt securities when borrowing money. The issuer pays interest on the loan and at a specified future date pays back the initial loan amount. Companies issuing debt do not dilute company ownership, and management maintains control over corporate operations. The bondholder has no claim on business profits. The company knows exactly what their liability is: the principal amount borrowed plus interest payments. The amount may vary if the bond is a variable interest bond. Interest is deductible on the company’s taxes. The underwriting process for bonds is less complicated than the procedures for issuing and selling new shares of stock. No obligation exists on the company’s part to send out reports or hold meetings for bondholders. Debt is temporary; the obligation is paid off when the bonds mature.
Disadvantages of Debt Securities
Loans must be repaid or the bondholder can take legal steps, including forcing the company into bankruptcy. Companies experiencing economic difficulties may have problems meeting interest payments. Interest expenses can be a drag on corporate operations and profits. Investors and analysts examine a company’s debt-to-equity ratio and, if too high, may consider the company too risky and not recommend investing in the business. The amount of money a company can borrow is limited by the amount of interest it can handle. Some loans require the company to pledge collateral or company assets.
Advantages of Equities
Companies can raise money by issuing new stock. The company receives a much-needed infusion of cash, and shareholders now have an ownership interest in the business. The company is not obliged to pay dividends, so there are no regular cash payouts. No debt is incurred, and there is no repayment requirement.
Disadvantages of Equity Securities
The stockholders are now owners of the company and can use their leverage to influence management. The possibility exists that management will lose control of the company. Companies at some point are pressured by shareholders to pay dividends, which are not tax deductible. The subtle influence and presence of shareholders sometimes forces management to neglect long-term planning and corporate strategy and concentrate on short-term operational requirements to ensure shareholders are happy with recent company results.