What are Trading Assets?

In the trading world, “trading assets” are a collection of securities. This collection of securities is held by a firm. The assets’ purpose is resale for a profit. Trading assets are considered to be a separate account from a trader’s portfolio. These assets can include: securities (U.S. treasury or mortgage-backed), Forex contracts, interest rate contracts, and more, and all are recorded at fair value when they are bought and sold. However, the recording differs based on who is doing the buying and who is doing the selling. Banks selling to other banks record assets as market-to-market, which impacts the fair market value of the trading asset, adjusting it.

This all may sound confusing, but, in this article, we will go over the different types of trading assets and their characteristics, simplifying it for beginning traders.

Trading Asset Classes

To start, let’s look at the broad categories of asset classes. Asset classes are a group of financial instruments, and there are four broad categories: fixed income, money market, equities, and alternative instruments. Think of these categories as the opening of a funnel through which you can winnow down to the specific trading asset you wish to trade.

Fixed income trading assets are investments that pay interest over time before returning to the original sum that you paid for them. An example of fixed income assets is a bond, which is the most common form of this class.

Money Market assets are very liquid and comprised of cash and its equivalents. This class includes currencies.

Equities are also known as stocks, and these make up shares in a company. Equities are probably the asset class that people are most familiar with, regardless of whether they trade or not.

Alternative Instruments is the fourth, broad class, and it includes many popular markets. Commodities and property fall into this category, but there is some debate as to whether each of these should form its own asset class. For now, you can think of them as alternative instruments.

When trading, you should spread out your assets across these categories, working with a broad range. This minimizes risk, and the strategy itself is known as “diversification.”

Trading Assets Terminology

There is also a lot of functional terminology that goes along with trading assets. To understand trading assets, you should know what the terms historical cost, contract units, and portfolio runoff mean.

Historical cost refers to the value of the original (or nominal) cost of an asset when the trading asset was acquired by the company recording the value. This is an accounting term, and the price is found on the balance sheet. The historical cost method of recording has a long history in the U.S., stretching back to white-paper times.

Historical cost is considered a tried-and-true method of accounting. Trading assets are to be recorded this way, even if their value has changed. The exception to this rule is marketable securities, which are recorded at their current, ever-changing market value.  

A contract unit is the actual amount of an underlying asset, and it is represented by a single derivatives or futures contract (which we will cover in a moment). This trading asset could be anything, from commodities to currencies. Some contract units, such as barrels of oil or foreign currency amounts, are highly standardized, while others are not.

For example, the contract unit for an options contract is 100-. This means that each contract is for the buying or selling of 100 shares. FYI: a “contract unit” is also occasionally referred to as a “trading unit.”

Portfolio runoff is an easy term to understand. When you prepay securities in your portfolio, and there is a decrease in the assets of the mortgage-backed portfolio of securities, this drop is called portfolio runoff. This risk is common among securities portfolios, though many of them have an embedded call option. Refinancing of mortgages is a common way that runoff occurs.

Two Must-Know Terms: Futures and Securities

No glossary of trading assets would be complete without a reference to the terms “futures” and “securities,” both of which are common trading assets that you will likely encounter or even work with when you are trading.

Futures

Futures are financial contracts that obligate someone to buy or sell an asset. This asset is sometimes a physical commodity. It can also be a financial instrument. This purchase or sale takes place at a predetermined date at a predetermined price. The contracts are specific, detailing the quality and quantity of the underlying asset. The contracts also can be standardized and specify delivery, as some assets may require physical delivery and others just cash. Futures are often used to hedge or speculate on an underlying asset’s price movement.

Securities

Another common term in trading assets, a security is a tradable financial asset, often a financial instrument. Securities come in two categories: debt and equity securities.

Debt securities are tradable debt instruments. They include government bonds, CFDs, preferred stocks, municipal bonds, and other like instruments. They are negotiable, including liabilities and loans.

Equity securities are investments in stock that are issued by a company. These securities represent the ownership and interest that holders have in a company.

Another notable type of security is an investment security, which is a security that is purchased in order to be held for investment. These differ from securities that are purchased for resale purposes.

Trading assets are fundamental parts of the trading ecosystem and, as you can see, they are broad and varied, encompassing a range of categories and types. To minimize risk, you should diversify your portfolio and work with many different types of trading asset classes.