One of the biggest decisions that the company must make is the exact composition of marketable securities that must be maintained, since it is difficult to make because in closing an alternative opportunity to earn interest on inactive funds and the purchase and sale of these
Marketable securities are money market instruments that can be easily converted to cash. The marketable securities are part of the current assets of the company.
The company may have different impulses to invest or obtain marketable securities, the most important of which is to maintain liquidity at any time. This motivation is also based on the premise that a company should try to earn returns on temporarily inactive funds.
The basic characteristics of negotiable securities have to do with the degree of their possible commercialization. For a security to be truly negotiable, it must have two basic characteristics, an easy market with breadth and the ability to minimize the amount of time required to convert it into cash and the probability of loss in its value, since if the market price that received when liquidating a security deviates significantly from the amount invested, this will not be attractive to the company.
The type of marketable securities a company purchases depends largely on the reason for the purchase and is based on security, transactional, and speculation reasons.
Means
The company seeks with the acquisition of negotiable securities, a source of immediate liquidity
Security
Marketable securities held for security purposes are used to service the company's cash account.
These securities must be very liquid, as they are purchased with funds that are needed later, even though the exact date is unknown. Consequently, they protect the company against the possibility of not being able to satisfy unexpected demands for cash.
Transactions
These marketable securities are held for transactional purposes, that is, it is expected with them to make some future payment, taking into account their convertibility into cash quickly. Many companies that must make certain payments in the near future already have cash in hand to make them.
To get some return on these funds, you invest them in a negotiable security with a maturity date that coincides with the stipulated date of payment. Since the exact date of payments is known, the company can invest its funds in an instrument that earns interest until the payment date.
Speculation
Marketable securities that are retained because the company sometimes does not have a use for certain obligations, are said to be held for speculative reasons. Although such situations are not very common, occasionally some companies obtain excess cash, that is, cash that is not used for any particular expense. Until the company finds a suitable use for this money, such as investing in new assets, paying a dividend, or buying shares, it invests it with certain more speculative types of marketable securities.
The trade-off between interest income and brokerage costs is a basic factor in determining the exact proportion of the company's liquid assets.
The securities most commonly held as part of the company's marketable securities portfolio fall into two groups: government missions and private issues.
Government emissions
The main marketable securities issued by the government are treasury certificates, tax credit bonds and treasury bonds.
Treasury certificates
Treasury certificates are probably the most popular negotiable security; they are returns are relatively low due to their characteristic of having a very low risk.
These are bonds that are sold for competitive posture and are awarded to the highest bidder; as they are issued to the bearer, they have a very active market for their commercialization. These are almost always sold at a discount to the face value, which is received at maturity.
Tax credit bonds
These are issues that governments make to cover current balance of payments expenditures. Their appeal is that they are accepted by governments as partial or total payment of taxes for the taxable year at face value.
Treasury bonds
Treasury bonds have initial maturities of one to seven years, but due to the existence of an active secondary market they are very attractive investments, since a company receives its maturity in less than one year.
Private issues
These are issued by companies or by banks, normally these issues have higher returns than issues made by the government due to the risk involved in investing in them.
The main private marketable securities are negotiable documents, negotiable certificates of deposit, letters of credit and buy-back agreements.
Negotiable documents
The negotiable document is a short-term, unsecured note issued by a corporation with a high credit reputation. The return on this type of security is higher than that of any other type of security.
Negotiable certificates of deposit
They are instruments that show the deposit of a certain amount of money by a company in a commercial bank. The amounts and maturities are normally adapted to the investor's needs.
Credit letters
Letters of credit come from international business transactions. An importer, to finance a purchase abroad, draws against his bank for a cash advance. When accepted by the bank, the cash advance creates a commitment to pay the bank the borrowed funds, with interest, at a specified time.
The bank lends the money to pay the exporter abroad for the value of the merchandise bought by the importer. If the bank issuing the document does not wish to retain the acceptance until expiration, it can resell it at a discount to a third party who in turn can retain it until expiration or resell it again.
Buy-back agreements
A repurchase agreement is not a specific security, rather it is an agreement by which a bank or a securities dealer sells specific negotiable securities to a company and agrees to buy them back at a specified price on a specific date. In exchange for the expiration date adapted to the need offered by this agreement, the bank or securities broker offers the buyer.
When analyzing each of these securities, the company must create a portfolio that ensures the liquidity it needs at a certain time, as it was seen, each of this class of issues has its own innate risk and return characteristics, the issues that carried out by the government are the least risky and therefore their yields are lower, the opposite happens with those of the private type.
