Trading Assets: Meaning, Examples, and Use Cases

What Are Trading Assets?

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

Trading assets are positions acquired by a firm for short-term reselling to profit from price movements. They are also known as held-for-trading securities.

Key Takeaways

• Trading assets are securities held by a firm for profit.
• Treasuries, mortgage-backed securities, foreign exchange contracts, and other securities can be trading assets.
• The investment portfolio of a firm is separate from trading assets.
• Trading assets are considered current assets as they are intended for quick sale.
• The value of trading assets needs 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 to trade for profit. When a company buys and sells a trading asset, it is marked at the fair value. When trading assets are held by banks for other banks, they are valued at mark-to-market. Some banks are required to file reports with the government and the Federal Deposit Insurance Corporation (FDIC) for this activity.

Trading assets are found on the balance sheet and are current assets meant for quick buying and selling. While in a firm’s possession, trading assets should be valued at market value and updated on the balance sheet regularly. If the market value of trading assets changes, the balance sheet reflects the adjustment and any gain or loss is recorded on the income statement.

Example

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

Bank Trading Assets

As of Q3 2020, trading assets for all U.S. banks were valued at $758 billion, which accounted for 3.53% of total bank assets. JPMorgan Chase holds the largest amount of trading assets, with $263 billion, representing 11.26% of its total assets.

Trading Assets vs. the Investment Portfolio

Bank XYZ may have an investment portfolio consisting of bonds, cash instruments, and other securities that contribute to the long-term value of the bank. These securities may be used to purchase other businesses, assets, or contribute to long-term goals.

Bank XYZ holds its trading assets in a separate account from the long-term investment portfolio. Trading assets are held for a short period and traded in the marketplace to make a profit. Trading assets focus on the short term, while the investment portfolio is geared toward the long term.

Why Do Companies Hold Trading Assets?

Financial firms own most trading assets, as they have business segments involved in trading or investing in securities markets. Other companies may hold trading assets to hedge positions related to their core operations. For example, an oil producer may sell oil futures while an airline may purchase oil futures, both aiming to manage market risk in oil prices.

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.

Securities Classification

• Trading assets are securities held for less than a year and intended for profit.
• Available for sale securities are intended for sale before maturity, but after one year.
• Held to maturity securities will be kept until they mature or expire.