Security or public security terms can be explained as a financial instrument with a marketable monetary value. Securities can be traded both publically and privately. Privately held securities can be traded directly to potential investors.
Public securities are traded through public exchanges such as stock markets or over-the-counter financial markets.
Publically traded securities are a common form of raising funds and project investments for large companies.
They depict the ownership of the issuer and offer monetary values to investors, as the securities are traded their values change.
Security prices fluctuate due to several reasons, mainly due to the common demand and supply rule.
Depending on nature, public securities can be divided into two main categories:
EQUITY SECURITIES:
These are the most commonly traded form of securities. Companies issue securities in the form of equity and preferred stocks, usually through an IPO for the first time.
Large companies list their securities at stock exchanges, and small and medium companies may start listing on OTC markets.
There is no legal obligation or binding to pay a return on equity securities. Issuer companies do regularly pay dividends to common and preferred stockholders, but that doesn’t fall under contractual obligation.
The gains with equity securities are realized with their sale, capital gains.
DEBT SECURITIES:
Issuers’ prime purpose for both types of securities is the same, i.e. to raise funds. However, both securities come with different costs and benefits.
Investors may not be interested in equity or stocks due to risk and reward considerations. Debt securities offer a contractual return to investors for a specified time period and at an agreed rate of return.
Debt securities are borrowed money from investors; issuers of debt securities do pay a return and also pay back the debts in full. Debt securities include bonds, debentures, certificates of deposits, etc.
HYBRID SECURITIES:
Sometimes, large companies do also issue securities with hybrid features. These securities combine the characteristics of both debt and equity securities.
For example, preferred shares offer guaranteed returns and are also a form of equity. Convertible bonds are also a form of hybrid securities with debt repayments and the option to convert to equity or shares.
Public securities attract both investors and issuers as they offer some rewards to both. Issuers get much-needed finance, usually less costly than bank debts, and investors get their returns.
Depending on the nature and purpose of security, the accounting treatment varies for each type.
Accounting Treatment:
Public or marketable securities are traded through financial markets. Issuer companies may issue securities with different classifications. There are three common types when it comes to securities’ trading features:
Available for Sale securities:
As the name suggests the securities companies issue hold for sale. These securities are recorded at fair value on the balance sheet.
As these securities are retained as available for sale, there can be gains or losses arising from the sale of these securities.
Any changes due to fair value in the market, or gains or losses on sales are recorded on another Comprehensive Income segment of the income statement.
As the fair value of a security may change over time, any unrealized gains or losses are recorded under other comprehensive income on the balance sheet and carried over to the OCI segment of the income statement.
Held for Trading securities:
These debt or equity securities are usually purchased to be traded in the near future to harvest profits quickly.
These securities are initially recorded at fair value on the balance sheet under the current assets. Any gains or losses in the fair value of the security are then adjusted to reflect the current fair value or market value of the security.
If the securities are unsold from one accounting period to another, then any unrealized gains or losses compared to the fair value are adjusted to net income.
Held to maturity securities:
These are debt instruments sold and purchased for the long-term, usually starting with 5-year maturity.
Equity securities such as common stocks do not have any maturity date. So only held-to-maturity securities are debts issued by large banks and financial institutes.
Investors are attracted to a fixed return on investment with capital investment also repaid on maturity. The issuers look for a large sum of money when they issue long-term securities such as bonds.
These financial instruments are recorded as non-current assets on the balance sheet at their book value.
All interest or coupon payments arising from these securities are reported to net income. When the long-term held-to-maturity securities reach their last year of the maturity date, they are listed under current assets on the balance sheet.
The Balance sheet of the public securities holding company will usually list them under current assets.
Long-term securities such as bonds are listed under non-current assets. Any income arising from fair value adjustments from securities is listed under the other comprehensive income section of the income statement.
Capital gains or losses on the sale of these securities are reported to the net income on the income statement.
Similarly, capital investments and adjustments to the fair value of the securities are depicted on the cash flow statements.
