Trading securities are assets that a company purchases for a short-term profit, rather than holding them for an extended period of time. The trading securities will generally come from an industry that is similar to the company’s own business line. The trading securities will be valued according to their fair value, which means that they are trading at a value that runs in the market.
Trading securities may be debt or equity investments that a company buys and sells on a regular basis. These are considered short-term assets and are usually revalued each balance sheet date to reflect the current fair market value. These changes in fair value are reported on the income statement as gains or losses. Because trading securities will be sold at market value, they are categorized as short-term investments.
Trading securities are important for earning returns. The market value of trading securities is based on the company’s expectations about how much money it can earn. These investments are used to increase the value of the company. As with any other investment, the value of trading securities will fluctuate over time. This fluctuation will affect past gains or losses.
Many companies purchase shares in other companies. These shares are classified as trading securities on the balance sheet. Whether a company buys or sells trading securities has a significant impact on its accounting and reporting processes. For example, if a company buys a stock valued at $1 million, but the market drops 20 percent, the company must reduce its trading securities account balance to $800,000. This means the company must recognize a $200,000 loss on its income statement. If, however, the market increases, the company must record the increase as income, which may increase the company’s tax liability.
When trading securities on margin, the investor must pay extra attention to margin requirements. Margin trading is a risky business and can be a costly mistake. If you are not familiar with margin trading, consult a financial adviser before engaging in it. Margin trading involves using leverage to increase the purchasing power of an investment.
The fair value of trading securities is recorded through journal entries. These entries reflect the changes in the value of the assets. For example, if a security is worth $12,000 nine months ago, it would have a fair value of $1200 nine months later. At the end of the accounting period, the company would need to update the fair value of that security. A credit or debit for this amount would be applied to the securities-fair value adjustment account.
Publicly traded securities are closely monitored by watchdog groups and plaintiffs’ attorneys. If you engage in improper trading practices, you could end up being sued.