Types of Marketable Securities. Various types of marketable securities are available in the world financial markets. Bonds, stocks, preferred stocks, and ETFs are amongst the most popular examples of marketable securities available. All other marketable securities are known as ‘derivatives’. Money-market products, foreign currency exchange-traded funds (ETFs), derivative instruments such as options, forward contracts, swap agreements, interest rate agreements, and mortgage-backed securities are all examples of marketable securities that are traded on major stock exchanges. These securities are usually traded on futures exchanges.
Types of Marketable Securities Derivative Financial Instruments Risky instruments include CD’s, debentures, loans, mortgage-backed securities (mortgage-backed securities), equity securities, commodity-traded products, invoice financing, forward contracts, swap agreements, and credit risk. The risk associated with each type of derivative instrument varies. There is not one risk-type that is considered the ‘normal’ type of risk on marketable securities; however, each type of derivative instrument has a different unique risk factor. For example, one type of derivative is credit risk, which occurs when the prices of marketable securities change based on the credit rating of the issuing company. Credit risk arises from varying credit ratings between companies. Each time a company issues securities, its credit rating either increases or decreases.
Marketable Equity Securities is usually the best choice for short-term funding needs. Short-term funding needs can be met through marketable securities when there are sudden need for financial investors to liquidate their holdings. An example of a marketable equity security is the stock market. When market prices of publicly traded corporations fall, it often results in a drop in stock holders’ equity. In response, they may sell their shares in the stock market to obtain needed funds to meet their short-term funding needs. The sale of marketable securities in the stock market is known as ‘leverage’.
On the other hand, marketable securities can also protect and enhance investor’s wealth. In fact, these instruments are the best way for private investors and companies to protect their wealth. For example, they provide an alternative to ‘private equity’ when one is concerned with liquidity problems relating to fixed assets. Fixed assets, unlike equities, are not transferable between ownership groups. On the other hand, marketable securities can be easily and rapidly converted into cash.
Moreover, trading securities is an easy and reliable means of earning interest and income. However, these trading securities are not exempt from risks. The key risk that trading securities involves is that they can lose their value, even in the slightest changes in market prices. The loss of value is referred to as ‘risk’.
The risks can be reduced by proper use of tools like leverage, use of short sales and conversion techniques etc. Besides, one should also know that it is not necessary to hold on to marketable securities forever. It is always better to sell these securities after a year or so. This helps one to meet the demands of cash flow more quickly and easily. One of the ways to ensure a quick sale is to make the purchase of marketable equity securities from a financial institution. However, if one wants to earn interest on the sale of marketable equity securities in a year, then one has to hold on to them for one year.
In addition, it is important for investors to have a thorough knowledge of the market risk and to determine the cost of investment. One of the easiest ways of avoiding market risk is to make short-term liquid securities purchases, instead of holding on to long-term investments. It is also advisable for investors to choose longer maturity period for their marketable securities purchases. Usually, term maturity is about thirty years. However, this depends upon the amount of borrowed funds and the return expected on the original amount of the investment. A short-term liquid equity portfolio includes all marketable securities; while a comprehensive short-term liquid equity portfolio consists of marketable securities having a higher yield and having lesser duration.
Some of the common marketable securities include stocks, mortgage notes, trade debtors’ securities, government debt, secured loans, foreign real estate, equities, derivatives, warrants, structured settlements and bond index products. An interesting fact is that secondary market provides investors with the opportunity to buy and sell stocks without really going to the stock exchange. To invest in the secondary market, an investor need not open any market account. The broker does the investment management on behalf of the investor.