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.
