Marketable securities mean a short term financial assets that create interest for its holders and easily be converted into cash. They are securities or debts that are to be sold or redeemed within a year. At any time a security holder can sell this security in the financial market and can collect cash from selling this security.
Motives for holding marketable securities: There are three motives for holding marketable securities. These are given below –
(1) Transaction motive: Every firm maintains some lazy money to pay the price of raw materials, overhead cost and so on. This payment occurs at the point of time at this gap. Lazy money may be invested in short term financial assets. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payment i.e. enough cash is received when the payment has to be made.
(2) Safety/Precautionary motive: Future is always uncertain and ignore. Sometimes net cash inflow generates less than net cash outlay. For these reasons to maintain cash in hand. This is absolutely idle. The amount of precautionary cash is also influenced by the firm’s ability to borrow at short notice when the need arises. This cost may be used through purchasing or investing securities. The stronger ability of the firm to borrow at short notice lessens the need for precautionary balance.
(3) Speculative motive: In the business field, we can get unexpected opportunities for investing that is more beneficial and profitable. The firm will hold cash when it is expected that interest rates will fall. Securities can be purchased when the interest rate is expected to fall.
