What are the Different Types of Marketable Securities?

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  • Written By: K. Kinsella
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 25 May 2020
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Marketable securities are a type of negotiable investment that can be quickly converted to cash. Investors can sell marketable securities on the secondary investment market. While many investors like the liquidity that these investment instruments provide, some people hold onto marketable securities for decades. Marketable securities are classified as debt securities or equity securities, but not all types of debt and equity securities are marketable.

Stocks represent an ownership stake in a corporation and are a commonly traded type of marketable equity security. Publicly listed companies issue stock during initial-public-offerings, and thereafter shareholders can sell those stocks on the secondary market. Expanding companies periodically issue more stock to raise funds for mergers and acquisitions. The price of stock fluctuates based on supply and demand so although stock holders can convert stock to cash any time, the sale price may not equal the original purchase price. Investors hold stock in brokerage accounts and pay a trade fee to a stock broker who sells the stock on the investor's behalf.

Preferred stocks are another type of negotiable equity instrument. Someone who holds preferred stock has an ownership share in the company that issued the stock, but preferred stock holders, unlike common stockholders, have no voting rights. Investors who own preferred stock receive regular dividend payments, and these payments enable preferred stock prices to remain steadier than common stock prices. Preferred stocks, like common stocks, are usually held in brokerage accounts. Investors can sell the stock during the regular business hours of the market that the stock is traded on.

Bonds are the most commonly known marketable debt securities. Corporations and governments sell bonds to raise money for short-term projects. Bondholders are actually creditors who receive a return of premium along with interest if bonds are held to maturity. Many investors choose to sell bonds on the secondary market prior to maturity. The price a bondholder receives may vary from the purchase price of the bond, and some investors who need cash quickly even sell bonds for a discount.

Bank-issued certificates of deposit (CDs) are sometimes issued as marketable securities, but typically CDs are non-marketable, and the original purchaser most hold the CD until maturity. Marketable CDs are sold to brokerage firms which sell the CDs as a conservative alternative to bonds. Banks issue CDs to raise money for writing loans, and most CDs are non-marketable to prevent creditors calling in the loans prematurely before banks have raised sufficient funds through originating loans to settle the debt. Some government bonds are also non-marketable, and the original purchaser or the original purchaser's estate must redeem the bond at maturity.

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Post 1

In many cases, the benefits of investing in bonds outweighs those of buying preferred or common stock.

For one, most bonds carry a coupon that requires the company to make quarterly or semiannual interest payments.

If the payment is not made, bondholders can declare a payment default and either increase the interest rate or accelerate payment on the bonds.

Meanwhile, payment of stock dividends is tied to market performance and, in many cases, are not required.

Also, bondholders always enjoy payment priority over stockholders in a restructuring or bankruptcy plan.

In short, returns on bond investments are much more likely than on stock purchases.

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