A trader is a person who buys and sells financial assets in any financial market with the aim to benefit from trading operations. A trader mainly differs from an investor by time horizon as a trader would hold assets for a shorter period of time and tends to capitalize on short-term trends.
BREAKING DOWN Trader
Traders are either professionals working in a financial institution or a corporation for salary or self-employed individuals. They buy and sell financial instruments traded in the stock markets, derivatives markets and commodity markets, comprising the stock exchanges, derivatives exchanges and the commodities exchanges.
Many fresh investors turn to forex market in hopes of making a quick fortune. Unfortunately, the overwhelming majority of these individuals don’t have a clear trading strategy and, as a result, fail to turn a significant profit and even lose money. To counter this, an increasing number of highly competitive discount brokerages make the cost less of an issue for individual traders, while electronic trading platforms have tight spreads in the foreign exchange market. Another obstacle that can get in the trader’s way to a quick success is a disadvantageous tax treatment of short-term capital gains in the United States.
What you need to know about traders
As was already mentioned, traders buy an asset for a short period of time and then sell it quickly. Whether they work for big financial institutions and get fixed salaries or have their own sole trader business and retain all profits, all traders have their own style and employ different trading strategies, including:
- scalping – making a lot of small trades during a very short time to get profit from each trade;
- momentum trading – buying assets when they’re rising and selling assets when their prices have supposedly peaked;
- technical trading – analyzing price movement charts and using different technical indicators to find the best time for trading;
- fundamental trading – following and taking into account important economic events that can affect the price of the asset; estimating the economic strength of an asset;
- swing trading – holding positions for longer than one day to profit from an expected price change.
As you see, there are multiple ways to organize your trading experience. Traders can work independently or with the help of brokers. You don’t need to be a professional with financial education to start trading.
Institution vs. Own Account
Institutional traders are the largest players in the forex market. Large financial institutions tend to provide trading environment for traders to buy and sell a wide range of products on behalf of the company. Each trader is given a contracted limit of a position they can take, the position's maximum maturity and how much of a mark-to-market loss they can have before a position must be closed out. In this case the company has the underlying risk and keeps most of the profit, while trader receives a salary and bonuses.
Most individual traders have their own accounts and trade from home office, employ a discount broker and use electronic trading platforms. Their limits depend only on their own cash and credit and they keep all profits to themselves.
A stockbroker who executes trades for lower prices than a full-service brokerage, but provides no investment advice is called a discount broker.
Previously, when the Internet was not available to everyone, only wealthy traders could afford the broker service and participate in currency trading in the stock market. However, working with a discount broker can provide cheaper access to investments. This can lead to better decisions and bigger profits. At the same time, discount brokers don’t offer the same range of services that a full-service brokerage does.
Many discount brokers offer margin accounts, which allow the customer to use leverage to purchase securities. This means the account holder can take a loan from the broker to make investments.
Electronic Foreign Exchange Trading Platforms
An electronic trading platform is a computer software program used to match currency buyers and sellers in the spot and execute transactions within the financial markets. Forex platforms allow traders to register into the trading world and follow the rules set by financial institutions. This type of software allows an individual to place orders for various investment means through a financial intermediary such as a bank, broker, or exchange.
Short-Term Capital Gains Tax
As any other type of income, trading profit is taxable. Short-term capital gains have a big disadvantage as they are taxed at a regular income tax rate. On the other hand, long-term capital gains on most items are taxed at either 0%, 15%, or 20%, but they require the underlying instrument to be held for a minimum of one year.
2022-08-23 • Updated