Trading Assets Explained
What does it mean to trade assets and what are the different ways you can do this? Read on.
Trading assets are essentially a bundle of securities held by a company to be resold for a profit. Generally, assets are traded in the short term to benefit from market price movements.
Have you heard of treasuries or mortgage-backed securities? These are types of financial assets which a company could trade for short-term profits. Trading assets are not to be confused with the company’s investment portfolio, which is held for long-term gain. However, back to the drawing board: precisely what are trading instruments, and which assets can you trade?
What Are Trading Assets?
According to the financial dictionary on Investopedia.com, an “asset” is:
A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
Trading assets are quite simply financial instruments or securities that a firm will purchase to resell in the near future for economic gain.
Moreover, companies will seek out assets that will bring future value to the firm. By trading financial instruments, firms hope to benefit in some shape or form, be it from an immediate cash profit, better sales, or overall company value.
How Does Trading Assets In Banks Work?
Companies record assets on their balance sheets based on “historical cost.” In other words, a version of the original cost of the asset, adjusted for any improvements or updates. This works slightly differently with banks, however. Like corporations, banks will invest in trading assets as part of their securities, primarily in the form of government bonds, notes, or mortgage-backed securities. Firms will record purchases at fair value (“fair” to buyer and seller and based on current market conditions).
Banks selling trading assets to other banks record these as market-to-market value (calculated from the current market price or stock price). Of course, revenue and profit from trading assets are far from certain, and banks are not immune to losses. Bear in mind that banks with a higher number of trading assets do carry greater risk.
Which Assets Can You Trade?
Assets can be broadly broken down into four categories: money market, fixed income, equities, and financial instruments.
These trading instruments include cash assets and currencies, and this is a highly liquid market.
Investments that pay interest over time are known as fixed-income assets. Essentially, they have a fixed interest rate and include instruments such as government bonds.
Also known as “stocks,” equities are assets that make up the shares within a company. When a company offers equities, it is therefore selling shares representing partial ownership of the company.
The trading asset list is not finite. Any financial instruments that do not fit the above category would be considered an alternative investment. Alternative assets include real estate, hedge-fund investments, and valuable collectibles such as artwork. Today, cryptocurrencies are a burgeoning form of alternative assets.
Also, trading assets include “futures” and “securities.” A futures contract gives the holder the right (or obligation) to buy and sell an underlying asset at a predetermined price. Futures could be financial assets like stocks and shares or physical commodities. Securities are financial instruments you can trade. “Debt securities” include government bonds, CFDs, and loans. “Equities securities” are those mentioned above; investments in stock representing shared ownership of a company.
In the trading world, diversification is king. When trading, you should ideally spread your assets over a wide range to minimize risk in a process known as “diversification.” You may hear fellow traders talking about the need to ‘diversify their portfolio.’ Bringing us to the question, what is an investment portfolio, and how is this different from trading assets?
What Are Investment Portfolios?
Very simply, investment portfolios will have ownership of one or more financial assets, whether it is a stock, bond, commodity, or anything else. If you are actively managing your own portfolio, then this is not strictly an investment portfolio.
Keep in mind that investment portfolios are entrusted to an independent financial body, such as a stockbroker or investment firm. Some trading apps and platforms can directly clone the investments of successful investors and read their daily and weekly updates. Whether you choose to do it yourself or you prefer to hand over the keys to professional investors, the trading options are the same (although it may not necessarily be easy if you choose to go it alone).
For a broker to determine which is the correct type of investment for you, they will need to gauge the level of risk you are happy to undertake. Secondly, they will usually want to know about your personal finances to make sure you can afford to take the risk. This will be an individual assessment, and it is a good idea to ask yourself these questions if you want to be a sole trader. The final significant bit of information they will want to know is your investment timeframe. With all this information gathered, your investor will be able to determine if you wish to take the “strategic approach” or the “tactical approach.” “Strategic” implies long-term investments, and “tactical” implies short-term.
Comparing Investment Portfolios & Trading Assets
Clients who are more suited to low-risk investments will often be coupled with traditional assets such as bonds and blue-chip (reputable) stocks, for example. However, those who can afford and wish to take a more considerable risk may have their money invested in real estate, options, growth stocks, international securities, and others. Generally speaking, investment portfolios will be much more long-term oriented than trading assets because of the fees involved in the service and the difficulty involved in retrieving and making changes to your investments. Banks, too, will have a separate account for trading assets and investment portfolios. This is the main difference between the two approaches.
Underlying assets and company assets
If you are thinking about trading assets, it will help you to understand how “assets'” are used across the sector. An asset can be converted into money, such as art, property, companies, commodities, etc. When you are trading assets, you are exchanging one item of value for another. Currencies themselves are assets, and traders often bid on or against them on the forex market (“foreign exchange market”). Similarly, a “company’s assets” are all the things that the company owns (of value). However, an “underlying asset” refers to the asset that is being hedged, separate from the side bets and agreements being placed on top of it. Online trading platforms, such as TradeOr, will help limit any confusion and offer customer and technical support and 0% commission.
Trading assets refer to a firm’s ownership of securities and their subsequence reselling to companies and individuals for a profit. There are many different types of assets, such as money market, equities, fixed income trading. A sale of an asset can occur in several different ways, including debt securities, equity securities, futures, and options contracts. Understanding the essential workings behind trading assets will help you determine the type of trade you want to set up (be it alone or through an investment portfolio).
The different terminology in the financial sector can feel overwhelming, but our trading platform, TradeOr, makes trading easy and straightforward to understand.