Trading Assets Definition

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Trading Assets Definition

What Are Trading Assets?

A trading asset is a collection of securities that a company holds for the purpose of reselling for a profit. They are kept separate from the investment portfolio and may comprise US Treasury securities, mortgage-backed securities, foreign exchange rate contracts, and interest rate contracts.

Trading assets are positions bought by the company with the intention of reselling them in the near future to benefit from short-term price changes. As a result, they are often referred to as held-for-trading securities.

Key Takeaways

  • Trading assets are securities that a company holds with the intention of reselling for a profit.
  • Trading assets include treasuries, mortgage-backed securities, foreign exchange contracts, and other securities.
  • A company’s investment portfolio is maintained distinct from its trading assets.
  • Trading assets are classified as current assets since they are designed to be traded fast.
  • When trade assets are sold, their value must be updated on the balance sheet and reflected as a profit or loss on the income statement.

Understanding Trading Assets

Companies buy trading assets with the intention of profitably trading them. When a corporation buys and sells a trade asset, the transaction is recorded at the asset’s fair value. When banks hold trade assets for other banks, they are valued at mark-to-market. When engaged in this activity, some banks are obliged to submit reports with the government and the Federal Deposit Insurance Corporation (FDIC).

Trading assets appear on the balance sheet and are classified as current assets since they are intended to be purchased and traded rapidly for a profit. Trading assets should be valued at market value while in the firm’s possession, and the value should be updated on the balance sheet every reporting period. If the market value of trade assets falls or rises, not only is the asset value updated on the balance sheet, but this loss or gain, even if just on paper, must be recognized on the income statement.

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Example

For example, if a firm pays $2 million for shares of ABC company and the shares lose 30% of their value, the corporation would reduce the value of the trading assets to $1.4 million on the balance sheet and declare a net loss of $600,000 on the income statement.

Bank Trading Assets

Trading assets for all US banks were estimated at $758 billion as of Q3 2020. This amounted to 3.53% of total bank assets. JPMorgan Chase is the top bank in terms of trading assets, with $263 billion in trading assets, accounting for 11.26% of total assets.

Trading Assets vs. the Investment Portfolio

Bank XYZ will almost certainly have an investment portfolio comprised of different bonds, cash instruments, and other assets that add to the bank’s long-term worth as a commercial organization. The securities in the investment portfolio might be used to acquire additional companies or assets, or put toward the bank’s other long-term aims.

Bank XYZ would keep its trading assets separate from its long-term investment portfolio, retain them for a short amount of time, and then trade them in the market to generate a profit for the bank. The crucial aspect to remember is that trading assets are designed for the short term, but investing portfolios are normally designed for the long term.

Why Do Companies Hold Trading Assets?

Financial institutions with business divisions engaged in trading or investing in securities markets possess the majority of trading assets. Other businesses may own trading assets to hedge positions that are inherently tied to their primary activity. For example, an oil producer may sell oil futures while an airline would buy oil futures since neither wants to be exposed to market risk in the price of oil.

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How Are Trading Assets Reported on Financial Statements?

Trading assets are recorded as current assets on the balance sheet at their fair value. Unrealized profits and losses are recorded in cumulative other comprehensive income in the balance sheet’s equity column.

Aside from Trading Assets, How Else Can Securities Owned by a Firm Be Classified?

  • Trading assets are securities that are designed to be traded for profit and are kept for less than a year.
  • Securities that are available for sale are meant to be sold before maturity, but at a later date than one year.
  • Securities held to maturity will be retained until they mature or expire.

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