What is a Trader?

Published by Thomas Herold in Investments, Trading

'Trader' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Trader describes any person who participates in selling and buying financial assets on any of the global financial markets. These individuals might do this on their own behalf or instead on that of an institution or another individual. Some people have the tendency to confuse the titles trader and investor. The primary difference between the two pertains to the amount of time that each type of individual holds on to the asset in question. Traders generally keep assets for much shorter time frames in an effort to take advantage of rapidly developing trends. Investors on the other hand usually possess a longer time frame horizon for investing.

Such a trader might work on behalf of a financial institution. When this is the case, he or she will trade utilizing the firm’s credit and money. The person is then typically a salaried employee who has the opportunity to earn bonuses which are based on performance and returns garnered for the employing firm. Many other traders are self-employed. In these scenarios, they use their own money and credit to trade and also get to keep any and all of the profits personally.

There are definite disadvantages to trading shorter term. Among these are the spread between bids and ask that must be paid each time both in and out of the instrument and also the commission fees. This is how traders are able to run up substantial commission costs, as they often pursue such short term trading strategies in and out of financial instruments in an effort to realize profits. Thanks to the growing quantities of extremely competitive discount brokerage firms (like TD Ameritrade, E*TRADE, and Interactive Brokers), commission fees have become less of a disadvantage. With the advent of the all-electronic trading platforms offered (such as Meta Trader 4), foreign exchange market spreads have tightened considerably.

Still, the tax situation in the United States disadvantages traders and short term speculators on purpose. The Internal Revenue Service in America assesses steeply higher capital gains taxes on what they consider to be short term capital gains. Traders pay taxes on this money as if the gains were ordinary income, while longer term capital gains assess at a flat 20 percent rate.

With the institutions, they often fit out and maintain dedicated trading rooms to provide a work space for their proprietary traders to purchase and sell huge varieties of financial products for their companies. In these interesting scenarios, every trader receives a specified and pre-determined limit for how big their positions can be, how great a loss they are allowed to accrue before the positions will be force closed out, and the maximum amount of maturity time on the given positions. Because these institutional trading firms run all of the associated trading risk, they have the privilege of keeping the majority of any and all of the profits. The traders are engaging in this activity as employees who work for a salary and potential bonuses for a job well done.

The vast majority of individuals instead trading for their own personal accounts do this either from a small office or from the convenience of their own home. They will choose to work with electronic trading platforms (whenever possible) provided through a competitive discount broker in order to keep trading costs as low and reasonable as possible.

The advantage to the discount brokers is that they assess far lower commission fees per transaction. The disadvantage which is the flip side of this coin is that they do not offer financial advice, or they instead provide a bare minimum amount of it. A great number of the discount brokers do provide margin trading accounts to their members. This helps the traders to quickly and effectively borrow money off of the broker (without having to provide advance notice of a trade) in order to engage in a larger purchase. While this boosts the position sizes they can afford, it also multiplies the potential for losses at the same time.

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The term 'Trader' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.