A trading profit has two definitions. They are as follows:
- Investments. The earnings achieved by someone who invests in short-term securities. Because of the short (less than one year) holding period of these investments, trading profits are taxed at the higher ordinary income tax rate, rather than the lower long-term capital gains rate that is allowed for investments that someone has held for at least one year. The disparity between these tax rates is substantial, so the trading profit concept is important to a person paying taxes.
For example, a day trader buys securities for $1,000 and sells them a few hours later for $1,025, resulting in a trading profit of $25.
- Operations. Trading profit is equivalent to earnings from operations. Thus, it does not include any financing-related income or expenses, nor does it include any extraordinary gains or losses, or gains or losses on the sale of assets. This is a good indicator of the ability of the core operations of a business to generate a profit.
For example, ABC International has revenues of $1,000,000, cost of goods sold of $650,000, selling and administrative expenses of $250,000, interest expense of $75,000, and a gain on the sale of assets of $10,000. The trading profit for ABC excludes the interest expense and gain on asset sale, resulting in a trading profit of $100,000.
In regard to the operational form of trading profits noted above, trading profit also known as operating income.