Definition: Trading securities are investments in debt or equity that management plans to actively trade for profit in the current period. In other words, trading securities are stocks or bonds that management plans to purchase and sell in order to make money in the short term.
What Does Trading Securities Mean?
In accounting, we classify and value securities depending on what the company plans to do with them. There are three different classifications: trading, held to maturity, and available for sale securities. Each has a little different accounting treatment because management intends to use them in different ways.
Trading securities are the fastest moving investments of the three groups. These stocks and bonds are traded and managed regularly on the open market to make profits in the current period. In many cases, these investments are traded on a daily basis.
As a result, trading securities are always valued on the balance sheet at the fair market value. This treatment ensures that the amount reported on the financial statements reflects the economic impact of these investments. In other words, the company will most likely sell these investments in the next 90 days. Thus, they should be reported at current market prices to reflect what the company could gain from them if a sale took place today.
Since market prices change on a daily basis, the company must adjust the trading securities account to maintain these assets at their fair market value. This unrealized gain or loss is adjusted to a temporary account at the end of each period. Once the stocks or bonds are sold, the gain or loss is realized and the temporary account can be cleared. A realized gain or loss is then booked on the income statement for the period.