Securities are financial instruments such as stocks, bonds and options, and a trader's job is buying and selling them for a profit. Some traders work for firms and some conduct transactions for individual clients. Other traders only conduct trades in personal accounts, and although there aren't clients involved the Internal Revenue Service (IRS) still regards their activities as a trading business.
A securities trader must purchase assets with the intention to make a profit. To achieve this goal, traders develop and employ trading strategies that determine what they buy and when they do so. Traders monitor their strategies and redevelop them as necessary. Meanwhile, they must also monitor the markets they trade in and conduct market analyses to guide their decisions about when to enter or exit their positions.
Securities traders don't generally hold assets for very long. Sometimes securities are sold minutes or even seconds after they're purchased. To be a trader, an individual must try to profit from daily price movements, says the IRS. Traders cannot aim to derive their business' profits from long-term price appreciation, dividends or interest.
Risk management is an important part of security trader's job and should be used to regulate purchase and sell orders. Traders can quickly lose any profits they gain and their trading careers can come to a disastrous end if they fail to properly assess risk. To help prevent these events, traders use controls, such as diversification strategies and stop-loss orders, and they track their positions to stay aware of how much money they have at risk.
Securities trading is often misconceived as a leisure career. Even if a trader reaps major gains, he cannot simply take extended sabbaticals and return to work to bear the same title. A securities trader must maintain a substantial level of activity and trade continually and regularly. Otherwise, his tax status as a trader will change.
Securities traders must be good record-keepers. If they are subject to regulatory inquires, they need to have records of their transactions and documents to show they are complying with applicable rules and regulations. Since trading activities are subject to special tax considerations, the IRS also requires securities traders to keep detailed records. Traders often have some securities that are classified as investments. These assets must be differentiated in a trader's records on the day they are acquired, says the IRS. Individuals with securities trading businesses must also maintain documents related to their expenses, gains and losses to comply with tax regulations.
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