MARKETABLE SECURITIES

Market Security project

1. OMAIR QASIM FAIZAN TAHIR ORANGZAIB WAJID KHAN TAIMOOR NASIR Members

2. PRESENTED TO SIR AMIR

3. MARKETABLE SECURITIES TOPIC

4. WHAT ARE MARKETABLES SECURTIES FEATURES OF MARKETABLE SECURTIES TYPES OF RISK ASSOCIATED WITH ANY SECURITIES CLASSIFICATION OF MARKETABLE SECURITIES TYPES OF MARKETABLE SECURITIES WHY INVEST IN MARKETABLE SECURITIES METHODS OF MARKETABLE SECURITIES CONCLUSION CONTENTS

5. “Marketable securities are the financial instrument than can be easily bought and sold on a stock exchange within a short period of time.” In order to understand the above definition, we first need to understand one important term in the above definition – “financial instruments”. Financials instrument represents the legal obligation to pay or receive any monetary value. Financial instruments are the assets than can be exchanged or traded . All marketable securities are financial instruments but all financial instruments are not marketable securities. WHAT ARE MARKETABEL SECURITIES

6. There are many features of Marketable Securities these are discuss below: 1) Marketable securities are highly liquid Marketable securities are highly liquid and can be easily converted into cash within short time and at a reasonable price. What amounts to short time has not be defined anywhere but as per the conventions and generally accepted principles, this duration should be less than one year. Some of examples of instruments who exhibit the following features and hence classified as marketable securities are commercial paper, treasury bills, bills receivables and other short term instruments. FEATURES OF MARKETABLE SECURTIES

7. 2) MARKETABLE SECURITIES ARE EASILY TRANSFERABLE In order to be highly liquid, marketable securities should be easily transferable. Highly liquid and easily transferable features of marketable securities are complementary to one other. Marketable securities are instruments than can be easily transferable on a stock exchange or otherwise.

8. 3) LOWER RETURN ON MARKETABLE SECURITIES Return on any security is directly proportional to risk associated with it. Higher the risk, higher the return. Since marketable securities are highly liquid and easily transferable, inflation* and default risk* associated with them are very low in comparison to other types of securities. Investor has to make a trade-off between risk and return when choosing marketable securities.

9. FAIZAN TAHIR

10. Default risk:  Default risk is the probability that the issuer or borrower will not be able to make payments on their debt obligations on the due date. Interest rate risk:  Interest rate risk is the risk associated with the fixed return instrument like bonds, debentures whose value decrease on account of rise in interest rate. I nflation risk:   Inflation risk affects all types of securities. Though it affects every economy, it’s effect is seen more in high inflationary economy where price level of commodities rises drastically every year. Rise in price level reduces the value of money and the decreased value of money results in decreased return on assets. TYPES OF RISK ASSOCIATED WITH ANY SECURITIES

11. Marketable securities can be classified under two categories : MARKETABLE EQUITY SECURITIES MARKETABLE DEBT SECURITIES CLASSIFICATION OF MARKETABLE SECURITIES

12. Marketable equity securities are equity instruments that are trade on stock exchanges Marketable equity security can be both Common S tock and Preferred Stock If the Stock is expected to be liquidated within one year the holding company will list as a C urrent Assets If the company expects to hold the stock for more than one year it will listed as a non current Assets All marketable equity securities all current and non current are listed at the lower value of cost or market 1. Marketable equity securities

13. Marketable debt securities are those debt securities that are traded in bond market Common types of debt securities are Government bonds, Commercial papers and etc. Marketable debt securities are held as short term investments and are expected to be sold within one year If a debt securities is expected to be held for more than one year it should be classified as a long term investment on the companies Balance Sheet 2. Marketable debt securities

14. ORANGZAIB

15. There are different types of Marketable Securities.  Some of the common marketable securities available in the market are discussed here Commercial Paper Commercial papers are short term debt instruments with a maturity of not more than 270 days. They are unsecured debt i.e. they are not backed by collateral or, in other words, borrower does not guarantee payment. They are used for short term financing i.e. used for purchase of inventory, current assets and meeting short term liabilities. Since they are not secured, they are issued by large institutions and are purchased by big and wealthy corporates. Types of Marketable Securities

16. 2) BILLS OF EXCHANGE A banker acceptance is the amount borrowed by the borrower, promised to be paid in future, which is backed and guaranteed by the bank. Difference between commercial paper and bills of exchange is that bills of exchange unlike commercial paper is secured debt. Like commercial paper, it is also a short term finance instrument which is generally used for purchased of inventory, current assets and meeting other short term liabilities. Bankers acceptances specifies the amount of money, the due date and the name of the person to whom payment is to be done.

17. 3) TREASURY BILLS (T BILLS ) These T-bills are short term securities with maturity of less than one year. In market, one can find different categories of T-bills with three-month, six-month and one-year maturity. One of the feature of T-Bills which makes them popular with common investors is that they are not issued at large denominations. Like commercial paper, they are issued at a discount and investors gets a face value on maturity.

18. Government issues a T-Bill Face Value Rs 10,000 ; maturity six month at Rs 9,800 . SOLUTION – In this case, Investor will have to shelve Rs 9,800 for purchasing the T-Bill. At the end of six months, Investor can sell back the T-bill to Government at Rs 10,000 . Thus earning himself Rs 200 , which is a discount rate or the interest rate earned by holding the T-bill. Hence it is said that the T-bills are always issued at a discount. T- BILL EXAMPLE

19. 4) CERTIFICATES OF DEPOSITS These are similar to savings accounts. It is issued in lieu of the money deposited at a bank for a specified period. These are negotiable instruments and hence can be easily transferable. Maturity period of certificate of deposits varies from seven days to one year in case of commercial banks, and from one year to three years, in case of financial institutions

20. WAJID KHAN

21. Almost every Company will invest the certain amount of funds in marketable securities. Broad reasons for investing in marketable security as follows -: 1) Substitute for hard cash Marketable securities are great substitute for cash and bank balances Idle cash does not grow since no return is received by holding it . M arketable securities not only offer adequate return but also retains the benefits associated with holding money, since they are highly liquid and easily transferable. Why invest in Marketable Securities?

22. 2) Repayment of short term liabilities –  Every company has liabilities which are further bifurcated into short term and long term liabilities Long term liabilities are repaid over longer time period, which generally is more than one year. Whereas short term liabilities are to be paid within one year Bonus expense, tax expense and etc. are some of the examples of the short term liability Marketable securities are the best mode of payment of short term liabilities since they are highly liquid and in the meantime also provide the company additional income in form of interests and dividends.

23. 3) Regulatory Requirement In order to raise funds and loans from financial institutions, corporates have to follow certain guidelines and rules known as covenants which safeguards the interest of lenders Covenants are often in form of ratios which the borrower has to maintain throughout the loan period. These ratios mostly deal with liquidity and long term solvency health of companies Maintenance of marketable securities helps in meeting out solvency ratios since most of the marketable securities are considered as current assets

24. (1). Interest and dividend revenue Marketable securities earn dividend or interest revenue for the company. If a company holds a large sum of cash and does not invest it anywhere, it will generate nothing for the company. ( 2). Increase in market value: Marketable securities also generate a return when their market value increases Advantages of marketable securities:

25. (3). Liquidity Unlike long term investments, purchase of marketable securities does not impact the liquidity position of the business. They can be quickly sold in the secondary financial markets to meet immediate cash needs of the company. Continue…….

26. TAIMOOR NASIR

27. There are many methods of marketing securities some are discuss below Over the counter placement Right Issue Bonus Share Offer for Sale ….. Methods of Marketing Securities

28. It permits smaller companies to raise funds. A company may place its issue through OTC Exchange. The procedure involved under this method is that the company wishing to raise funds through OTC Exchange appoints a member of OTCEI as a sponsor. The sponsor appraises the project and values the share of the company. The sponsor ensures the success of the issue even if it has to subscribe to all the shares by itself. Over the Counter Placement

29. It is an invitation to the existing shareholders to subscribe for further shares to be issued by a company. A right simply means an option to buy certain privileged price within a certain specific period. Section 81 of the Companies Act 1956 has provided a pre emotive to the existing shareholders of a company to purchase shares in further issues of the company. Right Issue

30. A company having free reserves built out of genuine profits or share premium collected in cash may issue bonus shares to its existing shareholders The companies which have huge accumulated profits and reserves but not so good liquidity position prefer to capitalize profits by the issue of bonus shares. Bonus issue does not bring in fresh capital for the company, it only enables a company to restructure its capital. Bonus Share

31. Adopted in case of large issue of companies. The issuing company sells or agrees to sell the securities for sale to certain issue houses or the specialized financial institutions at a fixed price. The issue house or the financial institutions then issue advertisements making offer for sale of such securities at a price higher than the price at which they obtain the securities. Offer for Sale

32. All the above features and advantages of marketable securities have made them quite popular means of financial instrument. Almost every company holds some amount of marketable securities. The specific reason for holding these depend greatly on the solvency and financial condition of the company . Despite many advantages, there are some limitations like low return, default risk and inflation risk associated with marketable securities. Marketable securities are held by the company for trading purpose or liquidity purpose. Generally , these are held up to their maturity period, but company may sell them prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management . Conclusion