Buying Stock

Question: There are clearly different reasons for buying stock. Assume that Valente Corporation is holding

$25,000 in cash that it will not need for several weeks. The money is currently in a money market fund earning

only a 1 percent annual rate of return. In hopes of generating a higher profit, the president of Valente has studied

the financial statements of Bayless Corporation, a company with capital stock trading on the New York Stock

Exchange (NYSE) for $25 per share. On November 30, Year One, the president believes that Bayless stock is

primed to have a rather significant jump in market price in the near future. Consequently, Valente uses the $25,000

to acquire one thousand shares of stock in Bayless that will be held for only a few weeks or months. How does an

owner report an equity investment that is bought with the expectation that the shares will be sold shortly after the

purchase is made?

Answer: If management’s intentions are to buy and sell the equity shares of another company in the near term, the

purchase is classified on the balance sheet as an investment in trading securities. On the acquisition date, the asset

is recorded by Valente at historical cost.

As an owner, even for a short period of time, Valente might well receive a cash dividend from Bayless. Many

companies distribute dividends to their stockholders periodically as a way of sharing a portion of any income that

has been earned.

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