Final answer:
Trading securities are intended for short-term profit through active management and their gains and losses impact the income statement. Available-for-sale securities are designed for more flexible liquidity needs, and their gains and losses are reported in other comprehensive income until sold.
Step-by-step explanation:
Difference Between Trading Securities and Available-for-Sale Securities
Trading securities and available-for-sale securities are two types of investments that companies can make in the financial markets. A trading security is a stock or bond that a company buys and holds primarily for the purpose of selling it in the near term with the intention of generating profits on short-term price differences. These securities are actively managed and the unrealized gains and losses on these securities are reported on the income statement.
On the other hand, available-for-sale security is a financial asset that is not classified as a trading security or held-to-maturity investment. These can be sold in response to liquidity needs or changes in interest rates, but they are not intended for active trading. The unrealized gains and losses on available-for-sale securities are reported as other comprehensive income and are not included in the income statement until the security is sold.
Investors in the stock exchanges often engage in buying and selling both types of securities. The main difference between these two types of securities lies in their intent for investment and how they are reported in financial statements, which reflects their expected liquidity and impact on a company's financial performance.