trading securities
(noun)
any financial instrument an investor acquires and intends to resell in the short-term
Examples of trading securities in the following topics:
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Accounting for Sale of Debt
- How debt sales are recorded depends on whether the debt is classified as "held-to-maturity," "a trading security," or "available-for-sale".
- Unlike trading securities, the unrealized gain is recorded in the equity section of the balance sheet and does not effect the current year income statement at all.
- This is because, unlike trading securities, the loss from an available-for-sale security is not expected to be realized in the near future.
- Debt securities can be classified as "held-to-maturity," a "trading security," or "available-for-sale. "
- Summarize how to record the sale of a held-to-maturity, trading security and available for sale debt
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Accounting Methodologies: Amortized Cost, Fair Value, and Equity
- If a business holds debt securities to maturity with the intent to sell are classified as held-to-maturity securities.
- Held to maturity securities are reported at amortized cost less impairment.
- Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities.
- Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities.
- The ownership of less than 20% creates an investment position carried at historic book or fair market value (if available for sale or held for trading) in the investor's balance sheet.
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Redeeming at Maturity
- Debt securities can be classified as "held-to-maturity," a "trading security," or "available-for-sale. "
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Key Considerations for the Statement of Cash Flows
- Cash inflows include cash receipts from sales of goods or services; interest received from making loans; dividends received from investments in equity securities; and cash received from the sale of securities that were held for trading purposes, issued by other businesses.
- Securities that are held for trade are generally investments that a business holds for a very short period of time with the intent to sell for a quick gain.
- Transactions include the sale and acquisition of property, plant, and equipment; the collection and granting of long-term loans to others; and the trading of available-for-sale and held-to-maturity securities of other businesses.
- Securities that are held-to-maturity are those that a business plans to hold onto until the security's term is up.
- An available-for-sale security is an investment that does not qualify as "held-to-maturity" or "trading".
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Calculating Fair Value
- This necessitates identification of the market in which the asset or liability trades.
- An example would be a stock trade on the New York Stock Exchange.
- If the investment is considered a "trading security" or stock purchased for the purpose of selling it in the near term, the balancing debit or credit is charged to an unrealized loss or gain account.
- If the investment is an "available for sale" security, the balancing debit or credit also goes to an unrealized loss or gain account.
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Standard-Setting Groups: SEC, AICPA, and FASB
- That is left to the Securities and Exchange Commission.
- Securities and Exchange Commission (SEC) is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States.
- The SEC was given the power to license and regulate stock exchanges, the companies whose securities were traded on exchanges, and the brokers and dealers who conducted the trading.
- Currently, the SEC is responsible for administering seven major laws that govern the securities industry:
- The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law.
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Assessing Fair Value
- A company initially records the "available for sale securities" at cost.
- While holding onto the securities the company must calculate the fair market value for these securities at the end of each subsequent accounting period.
- Realized gains and losses are included in income; unrealized amounts are included in income (trading investments) or in other comprehensive income (available-for-sale investments).
- A company initially records the "available for sale securities" at cost.
- While holding onto the securities the company must calculate the fair market value for these securities at the end of each subsequent accounting period.
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Factors Affecting the Price of a Bond
- A bond is a financial security that is created when a person transfers funds to a company or government, with the understanding that at some point in the future the entity issuing the bond will have to repay the amount, plus interest .
- Note that the trading value of a bond (its market price) can vary from its face value depending on differences between the coupon and market interest rates.
- The discount rate is a measure of what the bondholder's return would be if he invested his money in another security.
- In practical terms, the discount rate generally equals the coupon rate or interest rate associated with similar investment securities.
- A bond is a financial security that represents a promise by a company or government to repay a certain amount, with interest, to the bondholder.
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Activities of the Business: Financing, Investing, and Operating
- Investing activities include purchases or sales of an asset (assets can be land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, payments related to mergers and acquisitions, and dividends received.
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What Is Cash?
- They are securities that can easily and quickly be converted into cash.
- While publicly traded stock could be easily sold and converted into cash, it would not be considered a cash equivalent because there is a risk that its value could decrease.