Cash and marketable securities are normally treated as one item in any analysis of current assets and holding cash in excess of immediate requirement means that the firm is missing out an opportunity income. Excess cash thus is normally invested in marketable securities, which serves two purposes namely providing liquidity and also earning a return. Investing surplus cash in marketable securities is normally a part of overall cash management. The task of financial managers, who become involved with marketable securities either full time or part time consists of three issues. Initially the managers must understand the detailed characteristics of different short term investment opportunities. Secondly, managers must understand the markets in which those investment opportunities are taught and sold. Finally managers must develop a strategy for deciding when to buy and sell marketable securities, which securities to hold, and how much to buy or sell in each transaction.
Need for investment in securities:
Marketable securities result from investment decisions that really are not the main part of the firm's business; however, marketable securities cannot be ignored, as they constitute a part of the value of the firm that is entrusted to management. However, they cannot use the short term surplus cash flows for any long term purposes. Surplus cash is thus invested in marketable securities primarily to earn an income, which otherwise remains idle within the firm. Companies which were flushed with money at one point of time and investing heavily in marketable securities, may issue short term securities to other and borrow money at another point of time. Another prominent reason for holding marketable securities is on account of mismatch between the borrowing and investment programs. Types of marketable securities:
Marketable securities available for investments can be grouped under several ways and they can be classified...