Trading securities are investments made by a company for short-term profit. They are recorded in the asset side of the balance sheet at the fair market value of the day they are recorded. This value should be updated each reporting period. These investments are made by the management of the company in order to generate a profit in a short period of time. The two types of trading securities are debt securities and equity securities. Both types of securities must be listed in a company’s balance sheet.
Trading securities are equity securities or debt securities that a company purchases for short-term profit. These investments are only held for a short time and are sold quickly. Companies typically purchase trading securities that are related to their business line. Since they are short-term investments, they can have a huge impact on a company’s profits and losses.
When a company makes its balance sheet, its trading securities account must be adjusted accordingly to reflect the actual market value of the assets. For example, a company may purchase a stock for $1 million, but then sell it for $800,000. This reduction requires the company to recognize a $200,000 loss on the income statement. A company must also account for any increase in value of its trading securities in order to recognize the increase in market value, which could increase its tax liability.
Another way to determine whether a particular investment is trading is to classify it as held for trading. Those securities are usually sold or transferred within a short time, and the gains and losses are recognized on the income statement. A company can also classify its holdings of equity securities as available for sale or held-to-maturity securities.
In addition to trading securities, a company may have equity shares in another company. These are classified as trading securities on the balance sheet. Bayless could also distribute cash dividends to Valente. Many companies issue shares to its owners, but the accounting procedures for these investments vary. The purpose of ownership will ultimately determine which accounting procedure is applied to the assets.
Another important difference between trading securities and held-to-maturity assets is the definition of “available for sale” securities. Held-to-maturity assets are securities that the company intends to hold until maturity, and are therefore more stable on the balance sheet than trading securities. For this reason, the value of these assets on the balance sheet should be updated regularly.
Marketable securities are short-term investments that can be converted into cash quickly. They are listed as an asset on the balance sheet and on the income statement. In addition, marketable securities are included in the cash equivalents line item. They may be debt investments or equity securities. While the returns on these investments are lower than on equity securities, they provide companies with the flexibility to earn low-risk returns on cash balances.