Why do companies hold marketable securities? Research Paper

Why Do Companies Hold Marketable Securities?
Name
Institutional Affiliation
Why Do Companies Hold Marketable Securities?
Marketable securities refer to liquid financial instruments that when deemed necessary, the investor can convert them into cash and at a reasonable price (Kenton, 2019). A company undertakes investments in marketable securities when it has surplus cash flow. Moreover, idle cash is a significant liability for the firm. If underutilized, the firm loses income from unmade investment or in other circumstances, it incurs interest charges on funds it borrows. Holding surplus cash is a disadvantage for the company, particularly, during inflation because it the cash loses value. Investing in marketable securities demands an intricate balance between the risk and return of investing in securities. Efficient managers have to be keen on maintaining this balance so that their actions do not result in losses. Barring these consequences, companies seek to hold marketable securities for transaction motives, safety, and speculative purposes rather than keeping idle cash.
The Transaction Motive
First and foremost, firms will hold marketable securities to convert them into cash at a later period and with the intent of making some known future payments (Shano, 2003). This procedure is referred to as the transaction motive. The relevant payments could be for a significant modernization program planned to be conducted in the foreseeable future, income tax payment, or a bond issue about to mature. A firm builds this asset class with the surplus cash that is within its ranks. In this regard, surplus cash refers to the excess amount when the firm’s receipts and expenditure are taken into account. Investing for transaction motives eliminates possible mismanagement of funds thereby creating a principal-agency problem. Even better is that it offers the firm an avenue through which they can make more returns.
In the fulfillment of this objective, the maturity date of the marketable security chosen should coincide with the required payment date. Treasury bills are excellent ideal opportunities that a company can seek to exploit through this system. Further, the firm can liquidate the cash when the securities when they deem it fit and more so when their expected payment dates approach. Nevertheless, the management should tread carefully in that they should make an excellent tradeoff between risk and return and the risk of holding idle cash balances. In this regard, an intricate understanding between the opportunity cost forgone and holding the right amount of cash should exist.
Precautionary or Safety Purposes
Besides transaction motive, a company can decide to hold marketable securities to service its cash account i...