What is Marketable Financial Instruments?
Marketable financial instruments are instruments that can be easily traded in an organised financial trading system, such as a stock exchange. The main feature of marketable financial instruments is the convenience with which they can be converted into cash when needed by the investor. Stocks, bonds and other types of securities, which can be traded easily in organised financial markets or between two investors with the help of brokers, are known as marketable securities.
Table of Content
Types of Marketable Securities
- Marketable Equity Securities: These include shares of common stock and most preferred stock, which are traded on a stock exchange and for which there are quoted market prices.
- Marketable Debt Securities: These include government bonds and corporate bonds which are traded on a bond exchange and for which there are quoted market prices.
Let us discuss these in detail:
Money Market Securities
One of the most reliable and highly liquid assets, money market securities are short-term bonds issued by governments or large financial corporations.
These include:
- Treasury Bills: These are short-term securities having a face value ranging from $1000 to $1million with a maturity period of three, six, or 12 months. These bonds are issued by the government; thus, they are least risky in nature.
- Euro Dollars: These are the deposits in banks that are either non-US or outside the US. These are issued by financial institutions with a short-term maturity period and varied face value. These are not totally risk-free instruments.
- Commercial Papers: These are short-term promissory note issued by organisations and are considered to be the safest option for investment. The face value of commercial papers is $100,000 with a maturity period of 270 days or less.
- Negotiable Certificates: These are the certificate of deposits that are issued by commercial banks with a face value of $100,000 or more and 14 days to one year maturity period. It is less risky in nature.
- Banker’s Acceptance: These are the treasury bills with bank guarantee. They are issued by non-financial organisations at a face value of $100,000 with a maturity period of 30-180 days. It is also a less risky investment.
- Purchase Agreement: It is an agreement wherein a security is sold on the condition that it will be repurchased by the seller in the future after a pre-defined period of time. It is issued by dealers at a varied face value, and the maturity period is very short (i.e., overnight). The risks associated with such securities are the residual credit risks.
Capital Market Securities
In such securities, the maturity period is greater than one year. For certain securities such as stocks have no defined maturity period.
Different capital market securities include:
- Fixed Income Securities: These are the securities in which the individual gets a guaranteed income on the invested amount but a low rate of interest.
- Bonds: These are the fixed-income securities in which payments are made to the investor based on the time and conditions mentioned in the agreement. The investor can sell the bond before its maturity based on the market conditions and rating of the bond by the credit agencies.
- Stocks: Stock is basically the share of ownership of an investor in the company, which also includes the claim of investor on the profits of the organisation. Stocks are traded in the stock exchanges like BSE or NSE.
- Municipal Bonds: These are the tax-exempted investments and thus, are the most preferred one after the government issued bonds. These bonds are issued by municipalities, states, and the central government to raise funds for the growth and development of infrastructure and other facilities for general public.
Derivatives
Derivatives are marketable securities, the investments values of which are dependent on the performance of several other securities. This implies that their values are derived from the value of other investment instruments. These include options, futures, warrants, etc. These you have already studied in the previous section.
Indirect Investments
Investments in securities made by purchasing the shares of an investment organisation are called indirect investments. An investment organisation tries to diversify its portfolio and generate funds for its business purposes.
There are three main types of indirect investments:
- Unit Trusts: It works according to the trust deed and is managed by fund managers. These are considered to be open-ended investments and their value is determined based on the number of units issued and the price of each unit. Its performance depends on the expertise of fund managers involved.
- Investment Trusts: These are open-ended investment companies that sell shares of the company even when the issue of Initial Public Offering (IPO) is over. One of the examples of this investment is mutual funds. Mutual fund organisations take money from different investors and then invest them in a wide variety of options like stocks, bonds, short-term assets, etc. In this way, all investors have ownership on the company.
Apart from open-ended investments, there are close-ended investments in which the companies do not sell shares when the IPO gets over. Only the initial shares are purchased and later traded in the stock market. - Hedge Funds: These securities are traded aggressively and purchased only by a few accredited investors as the capital pooled in it is very large. In addition, private and unregistered investment pools do not abide by the rules and regulations applied on mutual funds. These also do not include the regulations made for the protection of investor’s rights. Thus, these are not preferred by the average investor.
Non-marketable Financial Instruments
Non-marketable financial instruments are instruments, that are very difficult to trade in an organised financial market. These are risk free and safe investments that are traded in private transactions.
It is difficult to find a potential buyer for non-marketable securities and thus, some of the financial instruments that comprise non-marketable securities are traded in private transactions. Although these securities are difficult to trade, they form a significant portion of an investor’s portfolio. These securities are traded between investors and large financial institutions thus, are a risk-free and safe investment.
Let us discuss these in detail:
Savings Account
They are a form of non-marketable securities that earn interest over a period. The interest rates and maturity period depend on the banks.
Government Saving Bonds
These are tax certificates issued by the government at a specific rate of interest on the invested amount. Government bonds that cannot be traded in the open market constitute a part of government savings bonds. These government debt instruments are traded amongst investors and financial institutions (banks) indirectly.
Non-Negotiable Certificate of Deposits
These are the promissory notes issued by commercial banks and considered to be the safest option of investment. These include instruments like fixed deposits, recurring deposits, provident fund deposits and other fixed-income securities.
Money Market Deposit Account (MMDA)
MMDA securities have high interest rates along with some restrictions. For instance, in MMDAs, an investor is allowed a limited number of transactions every month.
