Many traders face difficulties with the industry’s technical language. Trading terminology and methodology differ from many other sectors, hence why many potential traders rely on professional firms instead of doing it themselves. For example, what is a trading asset or a security, and how do you use them in investing, if at all?
As one of Chicago’s top prop trading firms, we aim to demystify the process. Black Eagle Financial Group constantly looks for self-motivated traders with fresh perspectives who can keep us on our toes. Discover more below.
Spelling Out the Language of Trading
Before we can explore trading assets, we’ll need to define and explain a few other terms.
Liquid
An asset’s liquidity determines how easy it is to convert to usable finances. For example, cash or sweep funds are substantially more liquid than a stock, bond, or investment. You can immediately use your cash to purchase another item of equal value.
However, money tied up in an IRA or other investment has age restrictions and penalties for early withdrawals. Although you do own the funds in the IRA, it is less liquid than the funds in, say, a bank account. However, the funds in a bank account often do not gain much, if any, additional value over time.
Therefore, investing, hedging, and trading assets includes sacrificing some level of liquidity for the chance to increase the type and value of your marketable assets.
Fungible
Fungibility is the ability for someone to exchange an item or asset with another item or asset of the same value. For example, you can exchange a $1 bill for four quarters, 10 dimes, or 100 pennies without losing monetary value.
A car or house would be non-fungible because its inherent value can differ between persons. If you borrow someone’s car and return a different vehicle, despite it being the same year, make, and model, they may not be satisfied because of specific features in theirs.
However, consider if you borrowed the car at 50% gas and used 25% of the gas. You could return the exact vehicle with the gas refilled to 50% or with the money needed to pay for the additional gas as a more fungible exchange. Whether you refill the tank or offer the money to refill it, the lender receives an item of the same value.
Assets
Before we get to what is a trading asset, what is an asset in general?
An asset refers to anything that holds monetary or other value. They come in various classes that help determine the amount of risk that may come with trading them. These asset classes vary depending on their features, such as:
- Liquidity
- Level of maturity
- Risk in value changes
- The legality of the asset
- Expected return amounts
They also separate into financial and non-financial assets. Financial assets gain value from contractual rights and ownership claims, whether the asset comes in physical or tangible form or not.
Non-financial assets come in tangible form and derive value from their physical traits, like houses, wheat, or diamonds. It also includes intellectual property, like patents and trademarks.
Generally, the more liquid an asset is, the less risk there is associated with its value, and vice versa. As you will see, trading assets are a type of financial instrument.
Security
Security refers to fungible and tradable financial assets that hold some amount of monetary value, including:
- Notes
- Bonds
- Stocks
- Derivatives
- Investment contracts
Securities typically fall into one of three categories: debt, equity, or a hybrid. Debt securities represent money a party needs to repay, such as certificates of deposit (CDs) or corporate bonds. Equity securities represent shareholder ownership in an entity, realized as capital stock.
Hybrid securities combine elements of debt and equity securities, like equity warrants, convertible bonds, or preference shares. There are also derivative and asset-backed securities, which rely on the value of an underlying asset, whether lost, gained, or accumulated.
As the stock market in 2024 shows, liquidity in financial instruments like securities can have several benefits.
The Big Question: Trading Assets
Combining all the previous concepts, what is a trading asset? Trading assets refer to securities that firms hold to resell for a profit, usually to benefit from short-term price movements. Another name for a trading asset includes a held-for-trading security.
As mentioned, trading securities can be corporate bonds, capital stocks, asset-backed, or otherwise. Trading assets often include high levels of fungibility, meaning you can more easily trade them for cash value and profit.
Companies acquire trading securities to gain a profit quickly. You should find them on the balance sheet as current assets. However, the fair value only applies upon trading. Remember to note the market value if the firm holds onto the trading asset.
Firms should report their value changes each period on the balance sheet and income statement. As the market changes, the market value may shift away from the fair value. You’ll need to report the unrealized gains and losses from market value shifts in the balance sheet’s equity section.
When you trade assets banks hold for other banks, they mark off at mark-to-market value instead. Certain banks must file reports with the Federal Deposit Insurance Corporation (FDIC) and the government when dealing in mark-to-market trading assets.
Are Trading Assets Investments?
No, trading assets are not investments, so firms should be careful to keep the two apart. Trading firms use investment assets for long-term gains instead of short-term pricing shifts.
Trading securities should generally stay on the balance sheet for a few hours, days, or weeks at most. Medium-term trading may involve some bonds with a longer maturity rate, which usually lasts for a few months. CDs that last up to five years may also qualify as a medium-term trading asset.
Investments, or long-term trading, can last for several years or decades, like in IRAs, commodity investments, and large stocks with high profit growth.
Remember to keep investments in an investment portfolio, separate from the balance sheet and the trading securities you work with on much shorter terms.
Learn More With Black Eagle Financial Group
At Black Eagle Financial Group, we accept experienced traders who are building their knowledge base and skills to improve their trading decisions! We have hedge fund, financial services, and prop trading firm sectors with proven, reportable successes on our roster. We offer a mentorship program, custom reports, and ongoing support to make your life easier.
With us, you don’t have to be afraid of asking questions. “What is a trading asset?” or, “How do order flow strategies work?” are some topics our personally-customized mentorship plans cover. Are you ready to improve your trading habits? Contact Black Eagle Financial Group toll-free at +1 (833) 253-2453 or visit our contact page today.