What Is the Balance Sheet Classification of Trading Securities?

by Cam Merritt

Companies are able to buy and sell stocks, bonds and other securities just like individual investors. The securities that a company holds for investment purposes show up on the balance sheet as "marketable securities" and are classified as assets. "Trading securities" are a subset of marketable securities, so they, too, are assets.

Marketable Securities

A company classifies marketable securities in one of three categories -- trading, held-to-maturity and available-for-sale -- based on what it plans to do with them. Trading securities are those that the company buys and sells simply to make a profit off the trades, much like an individual "playing the market." Held-to-maturity securities are debt securities -- usually bonds -- that the company intends to keep until their maturity date, at which point it will collect the full interest or premium promised by the issuer. Available-for-sale securities are those that the company intends to hold on to for the long term -- for dividend income or interest, for example -- but that it would be willing to sell if the price were attractive enough.

Current Assets

Assets themselves fall into two broad balance-sheet categories based on liquidity, or how easily the company could turn them into cash. "Current assets" are those that could be liquidated immediately or very quickly -- usually within a year. If it's not a current asset, it's a "non-current" or "long-term" asset. The whole point of classifying a security as a trading security is to indicate that the company is ready to part with it at any time, so trading securities go on the balance sheet as current assets. In fact, all marketable securities are current assets. That's because even if the company intended to hold a marketable security until maturity, it still could sell it if it had to, and that makes it a current asset.

Fair Value

A company with marketable securities, including trading securities, must report them on its balance sheet according to their "fair value," an accounting term that, in this case, is essentially the same thing as their market value. Assets reported this way are called "marked to market." On every balance sheet reporting date, the company recalculates the securities based on their current fair value.

Balance Sheet Processes

Suppose a company purchases $1 million in trading securities. When it first buys them, the balance sheet shows $1 million coming out of the company's cash account and going into its trading-securities account. Since the total value of the company's assets hasn't changed, there's no need to make any changes to the other side of the balance sheet -- which is made up of liabilities plus stockholders' equity. Now suppose that at the next balance sheet reporting date, the stock's fair value has increased 4 percent. Marked to market, the trading-securities account shows a $40,000 gain. On the other side of the balance sheet, the $40,000 increase in assets gets matched by a $40,000 increase in retained earnings, a component of stockholders' equity. As long as the company holds the stock, however, that $40,000 increase exists only on paper. That fact is reflected on the company's income statement, where it's identified as an "unrealized gain" rather than cash income. If the stock loses value, meanwhile, the process is essentially the same: the trading-securities and retained-earnings accounts both decline in value, and the income statement shows an "unrealized loss."