Trading Assets

What Are Trading Assets?

Trading assets are a collection of securities held by a firm for the purpose of reselling for a profit. They are recorded as a separate account from the investment portfolio and may include U.S. Treasury securities, mortgage-backed securities, foreign exchange rate contracts, and interest rate contracts.

Trading assets include those positions acquired by the firm with the purpose of reselling in the near term in order to profit from short-term price movements. As such, they are also known as held-for-trading securities.

Key Takeaways

  • Trading assets are securities held by a firm for the purpose of reselling to make a profit.
  • Treasuries, mortgage-backed securities, foreign exchange contracts, and other securities can be considered trading assets.
  • The investment portfolio of a firm is kept separate from trading assets.
  • Trading assets are considered current assets as they are intended to be sold quickly.
  • The value of trading assets need to be updated on the balance sheet and recorded as a profit or loss on the income statement when sold.

Understanding Trading Assets

Companies acquire trading assets with the purpose of trading them for a profit. When a company buys and sells a trading asset, it is marked at the fair value of the asset. When trading assets are held by banks for other banks, they are valued at mark-to-market. Certain banks are required to file reports with the government and the Federal Deposit Insurance Corporation (FDIC) when engaging in this activity.

Trading assets are found on the balance sheet and are considered current assets because they are meant to be bought and sold quickly for a profit. While in the firm's possession, trading assets should be valued at market value and the value should be updated on the balance sheet every reporting period. If the value of trading assets decreases or increases in the market, not only is the value of the assets adjusted on the balance sheet but this loss or gain, even if only on paper, needs to be recorded on the income statement.

Example

For example, if a company purchases shares of ABC company for $2 million, and ABC's shares drop in value by 30%, the company would adjust the value of the trading assets to $1.4 million on the balance sheet and record a net loss of $600,000 on the income statement.

Bank Trading Assets

Trading assets for all U.S. banks as of Q3 2020 were valued at $758 billion. This was 3.53% of total bank assets. The largest bank holder of trading assets is JPMorgan Chase, holding $263 billion in trading assets, which is 11.26% of its total assets.

Trading Assets vs. the Investment Portfolio

Bank XYZ will likely have an investment portfolio with various bonds, cash instruments, and other securities that contribute to the long-term value of the bank as a business entity. The securities in the investment portfolio might be used to purchase other businesses, assets, or put toward other long-term goals of the bank.

Bank XYZ would hold its trading assets in an account separate from the long-term investment portfolio, hold them for a short period of time, and trade them as appropriate in the marketplace to make a profit for the bank. The key point to note is that trading assets are for the short term where the investment portfolio is typically geared toward the long term.

Why Do Companies Hold Trading Assets?

Trading assets are mostly owned by financial firms that have business segments involved in trading or investing in securities markets. Other companies may hold trading assets in order to hedge positions naturally related to their core operations. For instance, an oil producer may sell oil futures while an airline may purchase oil futures, both not wanting to be exposed to market risk in the price of oil.

How Are Trading Assets Reported on Financial Statements?

Trading assets are listed on the balance sheet at fair value and reported as current assets. Unrealized gains and losses are included in accumulated other comprehensive income within the equity section of the balance sheet.

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

  • Trading assets are those securities that are held for less than a year and are intended to be traded for profit.
  • Available for sale securities are intended to be sold before they reach maturity, but at some later period longer than one year.
  • Held to maturity securities will be kept until they mature or expire.
Article Sources
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  1. Federal Deposit Insurance Corporation. "Schedule RC-D – Trading Assets and Liabilities."

  2. St. Louis Fed. "Total Trading Assets for Commercial Banks in United States."