Definition
A Held-For-Trading Security refers to a type of short-term investment asset that a company intends to sell within a short period, typically within a year, with the goal of earning a profit from short-term price fluctuations. These securities are purchased and held primarily for selling in the near future and are reported at fair market value on financial statements. The changes in fair value are recognized as gains or losses in the income statement.
Phonetic
The phonetics for ‘Held-For-Trading Security’ are ‘hɛld fɔːr treɪdɪŋ sɪˈkjʊrɪti’.
Key Takeaways
- Held-for-Trading Security Definition: These are financial assets or liabilities that a company intends to sell in the short-term for making profits from the temporary price differences. They are commonly used in active trading strategies.
- Accounting Treatment: Held-for-trading securities are recorded on a balance sheet at fair value, and any changes to the value are recorded in the income statement. This process allows companies to reflect the most accurate value of these securities in their financial reports.
- Risk Factor: These types of securities tend to have a higher risk due to market fluctuations. The value of held-for-trading securities can vary greatly in a short period of time, implying a condition of potentially high profit or high loss for the company holding them.
Importance
Held-For-Trading Security is a critical term in business/finance because it refers to a type of investment that a company or investor plans to sell within a short time—usually within a year. This concept is crucial for financial planning and strategizing. These securities, often in the form of debt or equity, are bought with the primary intention of short-term profit making through price changes. Thus, they are seen as liquid assets and are marked to current market value at the end of every accounting period. Changes in their value, either gains or losses, are accounted for in the financial statements immediately, affecting a company’s reported earnings and overall financial health. Therefore, understanding this concept aids in performance evaluation, risk management, and financial decision-making.
Explanation
Held-For-Trading securities are financial instruments acquired by companies or investors with the primary goal of short-term gain. These securities are one of several categories of financial assets, including available-for-sale, or held-to-maturity, but are distinct due to their primary purpose of rapid turnover and profit extraction. Investors buy these securities not to secure long-term advantages, such as dividends or interest, but to profit from fluctuations in the financial market within a short frame – usually less than a year. These securities can be in the form of debt or equity from any public company and these holdings are updated regularly at fair values.The advantages of Held-For-Trading securities primarily pivot around the concept of liquidity, which is essential for companies and investors looking for quick returns on their investments. This kind of short-term trading strategy allows them to capitalize on any significant changes in the share or bond prices, which may occur due to situational or cyclical economic changes. Furthermore, profits from the sale of Held-For-Trading securities fall under the recognition of income – acting as a source of revenue. This is why businesses are looking at the strategy, as it provides them an opportunity to strengthen their income statement. Despite the potential high returns, it should be noted that this as a high-risk strategy due to the volatility of the market.
Examples
1. Investment Banks: Investment banks often invest in securities such as stocks, bonds, or derivatives that they plan on selling in the short term with the goal of making a profit. These held-for-trading securities are part of their trading account assets and are marked to market daily. For example, Goldman Sachs might purchase a large block of shares from a blue-chip company intending to sell it when the price appreciates.2. Mutual Funds: Some mutual funds, especially those that follow active management strategies, might hold securities for trading purposes. They often buy and sell securities based on market conditions aiming to generate higher returns. For instance, a Fidelity mutual fund might buy shares of a tech start-up if they believe the price will increase in the short term.3. Hedge Funds: Hedge funds are investment vehicles known for their active trading strategies. They might hold numerous held-for-trading securities because they engage in frequent buying and selling to exploit short term market fluctuations. For example, Bridgewater Associates, a popular hedge fund, often invests in a variety of securities aiming to sell them quickly for profit. They might buy a variety of foreign exchange derivatives based on their predictions on the currency market.
Frequently Asked Questions(FAQ)
What is a Held-For-Trading Security?
A Held-For-Trading Security is a financial instrument, such as a stock or bond, that a company has purchased with the intent of selling within a short period, usually less than a year, to profit from short-term price fluctuations.
Where are Held-For-Trading Securities reported?
Held-For-Trading Securities are reported on a company’s balance sheet as a current asset.
How are gains or losses from Held-for-Trading Securities recognized?
Gains or losses from these securities are recognized in the income statement and are calculated as the difference between the fair value and the cost at which they were acquired.
What’s the difference between Held-For-Trading and Available-For-Sale securities?
The primary difference lies in the intent of holding the security. Held-For-Trading securities are intended to be sold within a short term, while Available-For-Sale securities are held for an indeterminate period of time and may be sold in response to changes in liquidity requirements, changes in yields or changes in financing sources.
What types of entities hold Held-For-Trading Securities?
All types of entities, including corporations, investment funds, and personal investors, may hold securities for trading purposes.
Why might a company choose to hold securities for trading?
A company might choose to hold securities for trading if they believe they can profit from short-term price fluctuations. It’s a type of short-term investment strategy.
How does a change in the market value of a Held-For-Trading Security affect a company’s financial statements?
Any unrealized gains or losses, meaning those that have not yet been sold, are included in net income in the company’s income statement. Therefore, the value affects both the balance sheet (current asset) and the income statement (net income).
Are Held-For-Trading Securities considered liquid assets?
Yes. Given their nature of being frequently bought and sold, Held-For-Trading Securities are considered to be highly liquid assets.
Related Finance Terms
- Mark-to-Market
- Short-term Investments
- Financial Instruments
- Capital Gains
- Liquidity Management
