Marketable Securities: Trading

Definition

The term marketable securities, trading is used to describe investments in debt and equity securities that a company intends to buy and sell for profit.  Marketable securities, including common stocks and bonds purchased for the purpose of trading, are typically held for a period of less than three months.

Marketable securities are a subset of short-term investments; as such, they appear on the company's balance sheet as a current asset.

Explanation

Marketable securities are temporary investments one company makes in another, with the hope of providing higher returns to its shareholders.  There are two basic types of these securities:

  • Marketable Equity Securities:   common or preferred stock investments held by a company in another large corporation.
  • Marketable Debt Securities:  short term bonds held by one company in another large corporation.

The accounting treatment of marketable securities depends on whether or not the company acquiring these investments intends to hold them until they mature, trade them, or make them available for sale.

Marketable securities that are categorized as "trading" are those the company explicitly buys and sells for the purposes of generating short term profits.  Generally, companies hold these securities for less than three months.

GAAP requires adjustments to the income statement as the fair market value of securities categorized as "trading" change over time.  It's important to note this change in value does not require a balance sheet adjustment.  If the market price of a marketable security increases, the change in value is recorded as an unrealized holding gain on the income statement, while a decrease in the fair market price is classified as an unrealized holding loss.

Example

On February 1st, Company A purchases shares of common stock in Company XYZ for $500,000.  This common stock is being held by Company A for trading purposes, with the hope of generating additional profits due to near term movements in the price of Company XYZ's stock.   The journal entry to record the purchase of these marketable securities is as follows:

  Debit Credit
Marketable Securities: Trading $500,000  
Cash   $500,000

At the end of the first quarter, the market value of this stock increased to $510,000.    The journal entry to record the change in this market value would be as follows:

  Debit Credit
Marketable Securities: Trading $10,000  
Unrealized Gain on Marketable Securities: Trading   $10,000

Note:  Unrealized Gain on Marketable Securities: Trading is an income statement item.

In April, Company A sold their shares of Company XYZ for $515,000.  The journal entry to record this transaction would be:

  Debit Credit
Cash $515,000  
Marketable Securities: Trading   $510,000
Gain on Sale of Marketable Securities: Trading   $5,000

Once again, the Gain on sale of Marketable Securities: Trading flows to the income statement.

Related Terms

marketable securities, marketable securities: available-for-sale, marketable securities: held-to-maturity, ownership interest, equity method, cost method