Marketable securities is a broad term that encompasses investments a business may make within the securities market. The advantages of these types of securities can vary depending on the business, but generally, they are valuable investments with reasonably high returns that are still easily translated into cash. It is also worth noting that these types of investments can be used to hedge various types of risks.
These types of investments are reported on a balance sheet as cash and cash equivalents due to their liquidity, as well as short-term investments and, in some instances, long-term investments, and can provide businesses with rapid access to capital.
This image above depicts a balance sheet from Proctor & Gamble, where the cash and cash equivalents, short-term investments, and long-term investments underline the various line items that may depict marketable securities.
Marketable securities can include a variety of business investments, most of which are easily exchanged via a public exchange. These include debt securities, equity securities, and derivatives. Each of these investment types have different degrees of risk (and respective return), as well as relatively different functions from a strategic investing point of view.
EXAMPLEThe 2008 economic recessions are largely due to the irresponsible utilization of derivatives – in that case, primarily those reliant upon debts, such as home mortgages.
However, at the business level, derivatives have unique value due to the ability to hedge against various risks. Hedging is the process of purchasing derivatives counter to business risks being experienced, in order to offset any fluctuation in the external environment which may adversely affect profitability. This sounds confusing but is actually much simpler than it seems.
|Types of Hedging||Example|
|Hedging against foreign currency risk||When operating in a global market different than that of the home office, it is common to encounter the risk of fluctuating currencies. Let’s say that a company operating in both the United States and Australia (headquartered in the United States) is worried about exposure to the Australian dollar. They obtain 50% of their revenue in Australian dollars and therefore have a great deal of short-term assets in Australian dollars. By purchasing derivatives, the organization can profit from a decrease in value for the Australian dollar to offset what would have been lost in the valuation of their short-term assets.|
|Hedging against commodity prices||This type of hedging can relate to inventory. You own a coffee shop, so naturally, you’re buying a lot of coffee beans. You budget $500,000 for the purchase of coffee beans over a given quarter for all of your many successful locations. However, you buy them in batches over time. If the price of coffee beans spikes up, your $500,000 won’t buy you nearly as many coffee beans as you projected you would need. As a clever investor, you purchased derivatives in coffee beans to make sure you would offset this loss with profits in the exchange market.|
Source: THIS CONTENT HAS BEEN ADAPTED FROM LUMEN LEARNING'S “Securities Management” TUTORIAL.