When a company buys stocks or debt securities as investments, there are several different ways to account for them depending on what type of security they are. Accountants don’t really differentiate between debt and equity securities for investment classifications with the exception of held to maturity securities. All securities are simply viewed as investments. Accountants differentiate between investments based on what management plans to do with the investments. There are three different categories of investments based on management’s abilities and intentions: trading, available for sale, and held to maturity. Notice that management can’t just intend to do something with security. They must actually have the ability to act on their intentions. In other words, if management claims they want to sell their stocks, they must actually have a market and ability to sell them in order to classify the stocks as trading.
In a nutshell :
- Held-to-maturity (HTM) securities are purchased to be owned until maturity.
- Bonds and other debt vehicles—such as certificates of deposit (CDs)—are the most common form of held-to-maturity (HTM) investments.
- Held-to-maturity (HTM) securities provide investors with a consistent stream of income; however, they are not ideal if an investor anticipates needing cash in the short-term.