A trader is an individual who involves in the buying and selling of financial assets in any financial market, either for themself or on behalf of another person or organization. The key difference between a trader and an investor is the period for which the person holds the asset. Investors tend to have a longer-term time distance, while traders keep purchases for shorter periods to capitalize on short-term trends.
A trader can work for a financial institute, in which case they trade with the company’s money and credit and are paid a combination of salary and advantage. Alternatively, a trader can work for themselves. It means they are trading with their individual money and praise but keep all of the profit for themself.
Short-term trading disadvantages are commission costs and paying away from the bid/offer spread. Because traders often involve in short-term trading strategies to chase after revenue, they can rack up large commission fees.
However, a growing number of highly competitive discount brokerages has made this cost less of an issue, while electric trading platforms have tightened spreads in the foreign exchange market. There is also detrimental tax treatment of short-term capital gains in the United States.
Trader Operations: Institution vs. Own Account
Many large financial institutes have trading rooms where traders are workers who buy and sell a wide range of products on behalf of the company.
Each trader is given a boundary on how large a position they can take, its maximum maturity and how much of a mark-to-market loss they can have before a function must be closed out. The company has the primary risk and keeps most of the profit; the trader accepts pay and bonuses.
On the other hand, most individuals who trade on their accounts work from home or in a small office and utilize a discount broker and electronic trading platforms. Their limits are dependent on their cash and credit, but they keep all profits.
Discount Brokers: An Important Resource for Trader
Discount brokerage firms charge significantly lower instructions per contract but provide little or no pecuniary advice. Individuals cannot trade straight on a stock or service exchange on their account, so using a discount broker is a cost-effective way to gain market access.
Many discount dealers offer margin accounts, which allow traders to borrow money from the broker to buy stock. It increases the size of the positions they can take and rises the possible damage.
Foreign exchange trading platforms match cash buyers and sellers in the spot, forward, and options markets. They sharply increase the amount of price data available to individual traders and thus narrow price spreads and reduce commissions.
Short-Term Capital Gains Tax
A disadvantage of short-term trading revenues is that they are usually taxed at the trader’s ordinary income tax rate. Long-term capital increases are taxed at up to 15-20% but need the underlying instrument to be held for one year.
Under current laws, there is no technical definition of traders for taxes. While there is a Trader Tax Status (TTS), election for this status is based on presented facts and circumstances of an individual. The IRS considers some points while evaluating traders’ tax status: holding period of securities, number of trades conducted, and frequency and dollar amount of transactions.2
There are workarounds for traders to decrease their tax liabilities from rapid term trades. For example, they can write off expenditures utilized in their trading arrangement, like freelancers or small business owners. If they selected Section 475(f), traders can be worth their entire trades for a specific year and claim deductions for the losses they incurred.2
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