Why do companies hold marketable securities?

Expert Solution

Marketable securities are financial instruments that are liquid and can be quickly converted into cash at a reasonable price. Companies instead of holding idle cash, invest in short-term liquid securities. The company can earn returns on it and if a sudden need for cash arises, these securities can be liquidated. Such obligations are paying to creditors, unexpected market opportunities etc.

Examples : commercial paper, Treasury bills, banker's acceptances, and other money market instruments.

Cash is required by the companies to conduct business operations. When cash flows are uneven, and some obligations become due, the company can take advantage of these marketable securities. Since these marketable securities are of short term maturity, when they are sold in the market there will not be much loss. Since they are short term in nature, these are less risky also. Effective cash management involves synchronizing cash inflows and outflows, managing the cost of float and investing idle cash in liquid securities. Thus cash management calls for investment of cash in marketable securities.

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