In 2002, 67 percent of Americans owned stocks. Recessions and financial jitters have eroded investor confidence to the point that as of April 2011, only 54 percent of Americans owned stocks, according to Gallup. Investments in stock involve the risk of loss. If the market price of the stock declines, you could lose up to 100 percent of your investment. If the market price rises there is no limit to your profit potential.
Trade Vs. Sale
When it comes to terms like "trade" or "sale" there are a lot of semantics involved. For tax purposes, most of your stock transactions will fall in the sale category. The Internal Revenue Service considers the transfers of property such as stock for money to be a sale. The transfer of property such as stock for other property is a trade. Both types of transactions are taxed in the same manner.
Trader Vs. Investor
You are probably an investor rather than a trader, at least for federal income tax purposes. The IRS only considers you to be a trader if you pursue profits from daily market price changes of your stocks, rather than from dividends or capital. To be a trader your investment activity must be regular, continuous and substantial. Trading stocks should be a significant part of your livelihood. Traders get to take some tax deductions that are not available to investors, but whether those tax breaks are worth the risk of trading is questionable.
A 2004 study published by the Hass School of Business at the University of California, Berkeley, analyzed day trading in Taiwan, where the practice was prevalent. The study revealed that 80 percent of day traders lost money in a typical six-month period. Heavy traders tended to make a profit from their trades, but those profits were offset by commissions and transaction fees. Experienced day traders with strong track records tended to earn significant profits. The study concluded that there was not sufficient empirical evidence to determine whether day traders in the U.S. made money.
Investing in Stocks
Stock prices rise and fall, but the overall trend of the U.S. stock market as a whole for the past century has been up. The Security and Exchange Commission's Investor.gov website notes that investors who hold stocks for long periods of time, for example 15 years, tend to earn strong returns on their investment.
- Haas School of Business: Do Individual Day Traders Make Money?
- FINRA: Day Trading Margin Requirements: Know the Rules
- Internal Revenue Service: Topic 429 - Traders in Securities
- Investor.gov: Stocks
- Gallup Economy: In U.S., 54% Have Stock Market Investments
- Internal Revenue Service: Publication 550, What Is a Sale or Trade?
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.