What Is a Held-For-Trading Security?

A held-for-trading security is a debt or equity investment that investors&n🥃bsp;purchase with the intent of selling within a short period of time, usually less than one year. Within that time frame, the investor hopes to see appreciation in the value of th🧜e security and sell it for a profit.

Because of 澳洲幸运5开奖号码历史查询:accounting standards, companies have to classify investments in debt or equity securities when they are purchased. Other than held-for trading, other options include 澳洲幸运5开奖号码历史查询:held-to maturity or 澳洲幸运5开奖号码历史查询:available for sale.

Understanding a Held-For-Trading Security

Held-for-trading securities can generate a profit from short-term price changes when investors sell them in the near term. They are short-term assets, and their accounting reflects that fact; the value of these investments is reported at 澳洲幸运5开奖号码历史查询:fair value, and 澳洲幸运5开奖号码历史查询:unrealized gains and/or losses are included as earnings.

The initial cost basis of these investments equals their fair value at the time of purchase. Over time, the 澳洲幸运5开奖号码历史查询:market value of trading securities changes, and 🎃;investors must report any unrealized gains and/or losses as earnings. The calculation of those gains and losses involves comparing a tra🥀ding security's fair market value to its original purchase cost basis.

Held-for-trading securities are classified as 澳洲幸运5开奖号码历史查询:current assets since they will be sold within a year and the cash flows from these securities are considered 澳洲幸运5开奖号码历史查询:operating cash flows. Cash flows from held-to-maturity and available for sale securities are 澳洲幸运5开奖号码历史查询:cash flows from investing.

Held-For-Trading Security and Fair Value A🧸djustment

Any increase or decrease in the fair value of a held-for-trading security requires an accounting adjustment. One must add or subtract the change from the security's previously reported value on the 澳洲幸运5开奖号码历史查询:financial statements.

An accountant achieves this by debiting an increase or crediting a decrease in the fair-value change to an account called "securities fair value adjustment (trading)," which is a sub-account of the asset account for trading securities. A debit or a credit to the account of securities fair value adjustment is an accumulation or d꧂eficit, respectively, to the fair value of the trading security.

Changes in the fair value of🐻 a held-for-trading security from one period to another become an unrealized gain or loss to earnings.

A debit to the account of securities fair value adjustment from an increase in the security's fair value requires a credit to record the unrealized gain that adds to net income. Conversely, a credit to the account of securities fair value adjustment from a decrease in the security's fair value requires a debit to record the unrealized loss that reduces net income.

Example of a Held-For-Trading Security

Suppose that Company ABC purchased a securitꦇy with the intent of selling it within a year. That security was recorded at its 🍒purchase costs when it was bought.

Now suppose that nine months have gone by and the security had a fair value of $1,000 as last reported on its financial statements. In the following quarter, by the end of the current accounting pe𓂃riod, the security is trading for $1,200 in the market, which is the fair value of the security.

Per accounting standards, the company will have 🔯to𒈔 record the new fair value of the security in its quarterly reporting. The fair-value-adjustment accounting requires a debit of $200 to the securities-fair-value-adjustment account.

Given the original value of $1,000, the trading-security account for this particular security ends the period wi♒th a fair value of $1,200. The $200 is also an unrealized gain that is reflected in earnings.

When the next accounting period arrives and the updat♈ed fair value of the security needs to be recorded, the calculation determining an increase or decrease will start from $1,200🎶.