The Accounting Guru, Investments

What are Investments?

According to the International Accounting Standards Board, (IASB) investment are assets held by an entity for accreation of wealth through capital distribution, dividend payments, rentals, short-term price fluctuations, interest and other benefits through trading and banking transactions.

Investments are also held by entities for the protection of interest, for ownership control and for other diverse managerial reasons.

What are the most common types of Investments?

  • Available For Sale Securities — as the name suggests available for sale securities are investments held by an entity indefinitely and are kept intact for liquidation purposes and equity appreciation.
  • Trading Securities — are short-term marketable securities that are constantly traded. Entities profit on trading securities through short-term fluctuations on the fair market value of the investment.
  • Held to Maturity Securities — are securities which are held by an entity for a specified period of time. It ussually involves large borrowing covenants such as bonds payable.

What is an Equity Security?

The term “equity security” encompasses secuirities that represent ownership in another company. The acquisition of such security is for the purpose of earning dividend income and increasing the net worth of the compnay through increase in market value of the secrities.

Equity security, therefore, are shares of stocks either ordinary or preference, stock options, warrants and other stock rights.

What is a Debt Security?

Debt securities are securities which represent a creditor-debtor relationship. Usually a debt security has a maturity date and take the form of a financial liability. Examples of such are long-term bonds, treasury bills and redeemable/convertible preference shares.