Who is Trader Trader
Who is a trader?
A trader is an individual who participates in the sale and purchase of financial assets in any financial market, either for himself or on behalf of another person or institution. The main difference between a trader and an investor is how long a person holds the asset. Investors tend to have a long-term time horizon, while traders tend to hold assets for shorter periods of time to take advantage of short-term trends.
Main sockets
Traders are individuals who engage in short-term buying and selling of stocks for themselves or an institution.
Among the disadvantages of trading are capital gains taxes applied to trades and the costs of paying multiple commission rates to brokers.
Traders can be compared to investors seeking long-term capital gains rather than short-term profits.
Understanding traders
A trader can work for a financial institution, in which case they trade with the company's money and credit, receiving both salaries and bonuses. Alternatively, a trader can be self-employed, which means that they trade with their own money and credit while keeping all the profits to themselves.
Among the disadvantages of short-term trading are commission costs and bid/bid differential payback. Since traders often engage in short-term trading strategies to chase profit, they can charge large commission fees. However, an increasing number of heavily discounted discount brokers have made this cost less significant, while electronic trading platforms have narrowed margins in the foreign exchange market. There is also unfavorable tax treatment for short-term capital gains in the United States. 1
Trader's operations: Enterprise vs. Own Account
Many large financial institutions have trading rooms where traders are employees who buy and sell a wide range of products on behalf of the company. It gives each trader a limit on how big the position they can take, the maximum maturity of the position and how much loss they can suffer in the market before the position is closed. The company has fundamental risks and retains most of the profits; the trader receives a salary and bonuses.
On the other hand. Most people who trade on their own account work from home or in a small office, using a discount broker and electronic trading platforms. Their limits depend on their own cash and credit, but they keep all the profits.
Discount brokers: an important resource for traders
Reduced brokerages charge significantly lower commissions per transaction but offer little or no financial advice. Individuals cannot trade directly on a stock exchange or commodities at their own expense, so using a discount broker is a cost-effective way to access the markets. Many discount brokers offer margin accounts, which allow traders to borrow money from the broker to buy stocks. This increases the volume of trades they can take, but also increases the likelihood of losing.
Forex trading platforms match currency buyers and sellers in spot, futures, and options markets. They sharply increase the amount of price information available to individual traders, thereby narrowing spreads and reducing commissions.
Short-term capital gains tax
One of the disadvantages of short-term trading profits is that they are usually taxed according to the trader's normal income tax rate. Long-term capital gains are taxed at up to 20% but require holding the underlying instrument for a minimum of one year. 1
Under current laws, there is no technical definition of taxes on traders. Although there is a trader's tax status (TTS), the choice for this case depends on the facts and circumstances presented to the individual. Some of the facts that the IRS sees while assessing the tax status of traders are the period of holding securities, the number of trades made, the frequency of trades and their amount in dollars. 2
There are solutions for traders to reduce their tax liabilities from short-term trades. For example, they can write off expenses used in their trading setup, such as freelancer or small business owner. If they choose Section 475(f), traders can fully evaluate their trades for a given year and claim a deduction of the losses they have incurred.