What are Securities?
What are Securities?
Securities can be defined as any financial asset that can be bought and sold in financial markets, has value, and is generally used for investment purposes. Examples of securities include stocks, bonds, notes, currencies, and commodities. These investment instruments are traded with the aim of providing a certain return to investors.
What is a Securities Exchange?
A securities exchange is an organization where securities are bought and sold in financial markets, and where stock exchange transactions are carried out. In these exchanges, securities such as stocks, bonds, notes, and futures contracts are traded.
- Securities exchanges bring buyers and sellers together, ensuring market transparency and enabling price determination.
- They provide liquidity to investors and contribute to the functioning of capital markets.
- Each country has its own securities exchange or exchanges, regulated according to the country’s economic and financial structure.
What Do Short-term and Long-term Securities Mean?
Securities are categorized based on their characteristics:
- Short-term securities are acquired to benefit from short-term price fluctuations or to earn interest income and are considered temporary (short-term) securities investments.
- Long-term securities are acquired to benefit from long-term price changes, earn interest income, or obtain dividends and are considered long-term securities investments.
- Investments of less than one year are called "temporary securities investments," while investments longer than one year are called "long-term securities investments."
Examples of Securities
Examples of securities include:
- Stocks
- Bonds
- Treasury Bills
- Commercial Papers
- Investment Fund Participation Certificates
- Profit and Loss Partnership Certificates
- Revenue Sharing Certificates
Stocks
A stock is a type of security issued when a company's capital is divided into shares. It represents participation in the company's capital and allows the circulation of shares, prepared in accordance with legal requirements.
Bonds
Bonds are debt instruments issued by corporations or public institutions to finance their activities. These instruments include a commitment to repay the principal borrowed and the interest calculated based on a predetermined interest rate at the end of a specified period or through another payment method. In Turkey, government bonds issued by the Central Bank of Turkey are commonly used.
Notes
A note is a debt instrument issued by public sector institutions or private sector entities, written as payable to the order or bearer, with a maturity of less than one year. Notes issued by public institutions are called treasury bills, while those issued by private sector entities are called commercial papers. Both have similar features, but differ based on the issuing entity. Treasury and commercial papers do not have periodic interest payments and cannot be converted to cash before maturity. However, they can be traded in secondary markets.
How are Securities Accounted for?
The presentation of securities in the context of a unified accounting plan includes:
- 110: Stocks
- 111: Private Sector Bonds, Notes, and Papers
- 112: Public Sector Bonds, Notes, and Papers
- 118: Other Securities
- 119: Provision for Impairment of Securities (-)
What is the Provision for Impairment of Securities Account?
The 119 Provision for Impairment of Securities (-) account is a liability account used to reflect decreases in the value of securities. This account adjusts for declines in the valuation process, affecting the asset accounts.
Sub-Accounts
When businesses decide to invest their excess cash in temporary securities, they should follow these steps for initial recording:
- Record the transaction in the appropriate account from the unified accounting plan based on the type of investment.
- Consider the type of security and the purpose of the investment.
- Open a sub-account in the relevant account based on the investment's objective.
- According to Turkish Accounting Standards, securities are classified based on their acquisition purposes, addressed with sub-accounts.
Securities Measured at Fair Value Through Profit or Loss
Known as "trading securities," this category refers to securities whose fair value changes are reflected in profit or loss according to Turkish Accounting Standards. These are usually financial instruments acquired for short-term gains from price fluctuations and are part of portfolios managed for a high return in the short term. Investments in equity-based financial instruments not listed in an active market and whose fair value cannot be reliably measured cannot have their fair value changes reflected in profit or loss. For example, if a company purchases shares of a non-public company, the fair value of these shares cannot be reliably measured, so their fair value changes cannot be reflected in profit or loss.
Available-for-Sale Securities
Financial assets defined as available-for-sale are those not classified as loans and receivables, held-to-maturity investments, or trading securities. This category includes securities that do not obligate the owner until maturity and can be sold before maturity if desired. For example, if a business wants to invest its excess funds in securities but does not want the investment to be binding and does not want to wait until maturity, it should classify these securities as available-for-sale.
Held-to-Maturity Securities
Non-derivative financial assets with fixed or determinable payments and fixed maturities that the business intends and is able to hold to maturity are classified as held-to-maturity securities. For example, if a business decides to invest its excess funds in securities, the factors determining the nature of the investment include when the funds might be needed, the investment's purpose, and the expected risk and return. If the business plans to hold the securities until their maturity, they are classified as held-to-maturity. However, according to Turkish Accounting Standards, if the business sells a significant portion of its held-to-maturity investments before maturity within the last two years, it will not be allowed to classify these assets as held-to-maturity in subsequent periods. Costs incurred for the acquisition of securities that are not reflected at fair value through profit or loss, such as commissions, are capitalized as part of the acquisition cost of the security. For instance, if a business pays a commission to a brokerage firm to buy securities traded on the stock exchange, this commission is added to the fair value of the security and recorded as part of the total cost of the security, rather than as an operating expense.
