Companies hold trading securities with the intention of selling them to make a profit. In the balance sheet, these are classified as a current asset.
What does trading securities mean?
Trading securities include both debt securities as well as equities. These are usually bought and sold on a stock exchange. In most instances, the value of these securities changes on a daily basis. The primary intention of a company in purchasing trading securities is to make a profit by selling them when there is an increase in price. These securities are held for short periods. When trading securities are sold, the gain/loss is recorded in the income statement as a line item with the title “Gain (Loss) on Sale of Trading Securities.”
Example of trading securities
A company classifies the securities that it holds under three categories: ⇨ Trading securities: described above. These are classified as current assets and are listed at their fair value. ⇨ Held-to-maturity securities: as the name implies, these securities are held until their maturity dates. These are typically debt securities. Held-to-maturity securities are classified as current assets only if they are due to mature within the next 12 months. ⇨ Available for sale securities: this is a default classification. Securities that do not fall under the category of trading securities or held-to-maturity securities are grouped under this head. Available for sale securities are recorded as current assets if they have a maturity date of less than one year. Otherwise, they are treated as long-term assets.
If a company buys debt securities or equities with the intention of selling them in the short-term to make a profit, the investments are classified as trading securities in the balance sheet. These securities are always reported at their fair market value in the financial statements.