Trading securities definition
/What are Trading Securities?
Trading securities is a category of securities that includes both debt securities and equity securities, and which an entity intends to sell in the short term for a profit that it expects to generate from increases in the price of the securities. This is the most common classification used for investments in securities.
Trading is usually done through an organized stock exchange, which acts as the intermediary between a buyer and seller, though it is also possible to directly engage in purchase and sale transactions with counterparties.
Accounting for Trading Securities
The accounting for a trading security involves its initial recognition, subsequent measurement, and eventual sale. The accounting for each of these phases is as follows:
Initial recognition. When a company purchases a trading security, it records the investment at cost (purchase price), including transaction costs.
Subsequent measurement. At each reporting date, if the fair value of the security changes, an adjustment is made to reflect the current market value. If the fair value increases, recognize an unrealized gain. If the fair value decreases, recognize an unrealized loss.
Sale of securities. When a company sells a trading security, it recognizes any realized gain or loss based on the difference between the selling price and the carrying amount (fair value).
Presentation of Trading Securities
Trading securities are always reported in the balance sheet as a current asset. This is because they are classified as being potentially sellable at any time, and so cannot be classified as long-term assets.
If there is a change in the fair value of a trading security from period to period, this change is recognized in the income statement as a gain or loss.
Other Types of Securities
Other types of marketable securities are classified as available-for-sale and held-to-maturity.