A trader is a person who buys and sells financial assets in any financial market having the aim is 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 contractually agreed bonus, 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. Unluckily, the prevailing majority of these individuals fail to turn a significant profit and even lose money having no clear trading strategy to match their personality and trading goals. However, an increasing number of highly competitive discount brokerages make this cost less of an issue, while electronic trading platforms have tightened 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.
Institution vs. Own Account
The largest players in the Forex market are institutions, or institutional traders, and investors. Institutional money accounts for the majority of Forex trading, estimated to be approximately 94.5% of the market volume. 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 he can take, the position's maximum maturity and how much of a mark-to-market loss he 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 account 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 themselves.
A stockbroker, an individual or a company who executes trade in lower prices than full-service brokerage price, but provides no investment advice is called Discount Broker. Previously, when the internet was not available to everyone, only wealth traders could afford broker service and participate in currency trading on the stock market. However, working with a discount brokerage can provide cheaper access to investments. This can lead to better decisions and bigger profits. At the same time, investors are not able to get as much detailed service as they would with a full-service brokerage. Many discount brokers offer margin accounts, that allows 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
A trading platform, also known as an online trading platform, or 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 to 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
Short-term capital gains have big disadvantage as they are taxed at a regular income tax rate. While long-term capital gains on most items are taxed at either 0%, 15%, or 20%, but require the underlying instrument be held for a minimum of one year.
2020-12-16 • Updated