Most investors build their investment portfolios with a diversified array of stocks, bonds and other assets. These highly liquid investments are known as marketable securities and make up the majority of the assets that investors buy. In this article, we’ll define what marketable securities are, identify the major types of marketable securities and share how they fit into your investment plan. A financial advisor can help you construct or modify an investment portfolio that best fits your goals, risk profile and timeline.
What are Marketable Securities?
Marketable securities are investments that are easily bought and sold on public exchanges, like NASDAQ and the New York Stock Exchange. Because these investments trade on a regular basis, they have high liquidity, which means that they can easily convert into cash without affecting their value. The most common marketable securities that investors own are stocks and bonds.
Types of Marketable Securities
Investors have their choice among a variety of marketable securities that trade regularly and are typically highly liquid.
Stocks, also known as equities, represent partial ownership of a company. Companies issue stock to raise funds through investors. Once a company goes public, investors are able to buy and sell these shares to other investors. Investors purchase stocks expecting them to rise in value as the company increases revenues and profitability. Some stocks also issue dividends to shareholders, which is a distribution of a portion of the company’s profits or available cash.
Prices of stocks fluctuate based on a variety of factors. These factors include the number of shares outstanding, company and industry news, quarterly earnings and projections for the future and the economic cycle. Occasionally, companies perform share buybacks which reduce the number of shares outstanding and increase the earnings per share for those that remain owned by investors.
Bonds are debt instruments issued by companies and governments that provide a fixed income. Each bond has a maturity date and stated rate of interest that the bond issuer will pay on a pre-determined schedule. Owners of bonds are considered creditors of the issuer. Investors primarily purchase bonds to receive income from the interest payments.
The value of bonds is impacted by changes in interest rates, ratings from agencies like Moody’s and how much time is left before its maturity. When interest rates rise, existing bonds usually drop in value and the opposite is true when rates fall. All things being equal, investors would rather have a bond paying 5% versus one paying 3%, so the one paying 3% would have a higher value than the one paying 5%.
Preferred shares of stock offer benefits from both stocks and bonds. These shares of stock represent ownership in a company, just like common stock shares do, but they also receive priority claims to dividends or asset distribution over common stockholders. However, preferred shares usually have no or limited voting rights, which can minimize their input on the direction of the company.
Not all companies offer preferred shares of stock. Investors typically buy preferred shares because they want to participate in the growth of the company, but they also want regular income from dividends. In the event that a company suspends dividends, preferred shares typically accrue dividends and are paid dividends that were missed before common shareholders start to receive dividends again.
Many investors use mutual funds to own a diversified portfolio of stocks and bonds. However, a big shortcoming is that mutual funds reprice only once a day when the market closes. Exchange-traded funds (ETFs) provide all of the diversification ratios of mutual funds with a low expense ratio and the ability to trade throughout the day like a stock or bond. Many brokerage companies have eliminated trading fees for ETFs which makes it easier for investors to buy and sell regularly or implement a dollar-cost-averaging strategy on buying EFTs in smaller increments on a regular basis.
Money market instruments
Money market instruments are highly liquid, provide interest like a bond, and are short-term in nature. These investments provide a high degree of safety, but with a low return on investment. They also typically have a term of one year or less. There are many types of marketable securities that are classified as money market instruments. Examples include Treasury bills, banker’s acceptances, purchase agreements and commercial paper.
Investors use money market instruments as a store of value. Smaller investors often use money market accounts to hold money in between trades. Larger companies and financial institutions use money market instruments for short-term borrowing and a place to store funds.
Marketable derivatives are futures, options and stock rights and warrants. The value of derivatives are directly dependent on the value of underlying assets, but they trade like a regular marketable security. Many fintech investing apps have lowered the cost of trading and made them more accessible to the common investor.
Accredited and institutional investors have access to another class of marketable securities called indirect investments. These investments include hedge funds and unit trusts that are typically more complex than other marketable securities. Indirect investments represent ownership in investment companies that invest in both marketable and private securities. Investments in indirect investments typically do not have the same liquidity as others on this list.
The Bottom Line
Each of these types of marketable securities has its reasons why they belong in your portfolio. For most people, a combination of stocks, bonds and money market securities will make up the bulk of your investments. Depending on your goals, risk appetite and time horizon, the investment mix of these securities within your portfolio will vary.
Tips on Investing
- Whether you want to invest in stocks, bonds or other assets, a financial advisor can help you design an asset allocation and then manage your investments for you. SmartAsset’s free tool can match you with up to three advisors in your area in just five minutes. If you’re ready to find a local advisor, get started now.
- Whenever you’re preparing to sell an investment, remember to consider your future tax liability. Profits from an asset that was held for under a year are taxed as normal income, while proceeds from an asset held for more than a year are subject to long-term capital gains rates. Use our capital gains tax calculator to find out what your tax bill will look like.
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