Intro
Securities are fungible financial instruments that are traded on stock exchanges. Trading securities are securities held by companies that are used to store excess money in a profitable way.
These instruments can be any form of security, including equity, debt and derivatives. However, they must be marketable, i.e. come to maturity within one year or be easily tradable on the open market. They usually are managed in three different ways:
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Reserved till mature
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Reserved for trading
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Open for sale
When a company purchases a trading security, it needs to know that it will likely make a profit in the short term. Also, they need to be able to trade out of the security (liquidate it) easily in case they need cash.
Trading securities on the balance sheet
A company needs to report its earnings, just as you have to do with your taxes. In accounting, trading securities fall in current assets. Accountants use the fair value method to record them. Fair value means that when they appear in the balance sheet, the current market value is shown. The main thing to remember about trading securities is their prominence in business for earning returns on available cash.
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