What is a 'Held-For-Trading Security'

A held-for-trading security refers to debt and equity investments that are purchased with the intent of selling them within a short period of time, usually less than one year. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased, with options to classify as "held to maturity," "held for trading" or "available for sale." With a held-for-trading security, gains and losses resulting from changes in the investment's value are recorded on an income statement as gains and losses.

!--break--Held-for-trading securities can profit from short-term price changes when sold in the near term. Held-for-trading securities (or simply trading securities) are considered short-term assets, and their accounting is handled as such. These investments are reported at fair value, and unrealized gains and/or losses are included as earnings.

Original Cost vs. Fair Value

A held-for-trading security is initially recorded at its original purchase cost. Over time, market values of trading securities change. By the end of the first accounting period, a trading security's fair market value is compared to its original purchase cost to determine any unrealized gain or loss. A trading security's fair value at the end of one accounting period is later compared to the fair value at the end of the next accounting period, with any gain or loss reported as income for the period in between.

Fair Value Adjustment

Any increase or decrease in the fair value of a held-for-trading security is added to or subtracted from the security's previously reported value. An accountant achieves this by debiting an increase or crediting a decrease in the fair-value change to an account called "securities fair value adjustment (trading)," which is a sub-account of the asset account for trading securities. A debit or a credit to the account of securities fair value adjustment is an accumulation or deficit, respectively, to the fair value of the trading security.

For example, suppose a trading security had a fair value of $1,000 as last reported, and by the end of the current accounting period, it is trading for $1,200 in the market. The fair-value-adjustment accounting requires that a debit of $200 be made to the securities-fair-value-adjustment account, adding to the $1,000 in the trading-security account to arrive at a $1,200 fair value for the security at the period end.

Unrealized Gain or Loss

Any change in the fair value of a held-for-trading security from one period to another becomes an unrealized gain or loss to net income. A debit to the account of securities fair value adjustment from an increase in the security's fair value requires a credit to record the unrealized gain that adds to net income. Conversely, a credit to the account of securities fair value adjustment from a decrease in the security's fair value requires a debit to record the unrealized loss that reduces net income. For actively traded securities, companies should report any fair value change and unrealized gain or loss in the period in which they occur.

BREAKING DOWN 'Held-For-Trading Security'

RELATED TERMS
  1. Available-for-Sale Security

    An available-for-sale security is a security procured with the ...
  2. Fair Value

    Fair value is the value of a company’s assets and liabilities ...
  3. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
  4. Unrealized Loss

    If the value of a transaction that has yet to be completed falls ...
  5. Fair Market Value Purchase Option

    Fair Market Value Purchase Option is the right, but not the obligation, ...
  6. Held To Maturity Security

    A held-to-maturity security is purchased by a buyer (often a ...
Related Articles
  1. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  2. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  3. Investing

    Role Of A Market Maker

    A market maker is a firm or an individual that stands ready to buy and sell a particular security throughout the trading session to maintain liquidity and a fair and orderly market in that security. ...
  4. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  5. Managing Wealth

    What Determines Your Cost Basis?

    The cost basis is the initial price paid in an exchange for a product or service.
  6. Investing

    Equity Valuation In Good Times And Bad

    Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.
RELATED FAQS
  1. How do marketable securities impact a company's financial statements?

    Understand how the various components of the financial statements are impacted by investments in marketable securities owned ... Read Answer >>
  2. How do you write off impaired assets from the financial statement?

    Learn what an impaired asset is and how it effects a company's financial statements. Understand how an accountant writes ... Read Answer >>
  3. What happens when my bank account is debited?

    A debit to your account happens when you use funds to purchase goods or services. Understand the process that takes place ... Read Answer >>
  4. Why is market to market (MTM) accounting considered controversial?

    Understand why mark to market accounting has been a major point of controversy because it requires all assets to be valued ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center