The Pros and Cons of Using Securities As A Down Payment

Securities or marketable securities for clarity refer to assets that are liquid and can be converted to cash anytime you want to. So if you are raising money for a down payment, sometimes you may be tempted to use them instead of withdrawing your savings from a bank account. Now the question is whether securities are the right source of funds for a down payment? You can arrive at an answer only after evaluating the pros and cons of securities used as a down payment. The first thing you should establish is what kind of securities you have on hand? What are the companies or government agencies or local government that issued them? These are some of the considerations that you must take into account before arriving at the decision.

Are The Securities Marketable?

There are several types of securities in the market which you may have in your vault. They normally mature in less than one year. Their marketability has less bearing on their prices. They can be easily disposed of on the secondary financial market in cash transactions. Many companies and individual investors resort to this kind of investment to park their extra cash in anticipation of profits in the financial markets. They are called marketable securities because they are regularly traded on the market and listed on an exchange. Some of these marketable securities are grouped as follows.

Equities

These are the openly traded shares of stocks in publicly held companies.

Debt instruments

They are bonds eg. corporate bonds or municipal bonds issued by local governments.

Other liquid assets

Other assets that are considered liquid because of their marketability include treasury securities, unit investment trusts, commodities, derivatives, mutual funds traded regularly on the secondary markets.

There are, however, some stocks and bonds that are not considered marketable because they are not readily traded on the secondary market. So their classification depends on the interest of traders in this type of securities.

Pros and Cons of Using Securities As A Down Payment

One of the advantages of securities is that they can be turned into cash. Just like your money in bank accounts (checking, savings and time deposits) you can always have the cash in your hands with little effort. The same happens with marketable securities, you can turn them into cash within a short period of time. That is why they are considered highly liquid assets.

If you need a specific fund for a down payment for your home, just call a broker. Your proceeds could either go up or down but the difference is insignificant except when there is a factor in the market that can affect your investment. But normally, investments in marketable securities normally bring a greater profit than what your bank deposits earn in interest. There is also a relatively lower risk of losing money when you invest your extra cash. There is more stability as compared to other investment opportunities.

The disadvantage of marketable securities is that they are not insured like your bank deposits in your checking or savings bank accounts. So there is also a great possibility that you will lose your money if the company that owns your shares of stocks suddenly collapses. However, this is a very remote possibility if you are a professional in this field of investment. Of course, you will not place your money on something that you are not familiar with.

Now that you know the advantages and disadvantages of securities, evaluating the pros and cons of using securities as a down payment can be done with less difficulty. You will just need to consider the difference of using your money in the bank as against turning your securities into cash. That is the decision you have to make.