Trading profit definition
/What is a Trading Profit?
A trading profit has two definitions, involving investments and operations. They are defined below.
Investment Trading Profits
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. As an example of investment trading profits, 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 Profits
Trading profit, also known as operating profit, represents the earnings a business generates solely from its core operational activities, excluding any income or expenses related to financing or non-operational events. It is calculated by subtracting the cost of goods sold and operating expenses—such as wages, rent, and utilities—from revenue. Importantly, it does not include interest income or expenses, tax liabilities, or any gains or losses from the sale of assets, which allows it to serve as a clear measure of how efficiently a company’s day-to-day business is performing. By isolating operational performance from external financial influences, trading profit provides valuable insight into the sustainability and strength of a company's core business model. Investors and analysts often rely on this metric to assess operational health, compare companies within the same industry, and evaluate management's effectiveness in controlling costs and driving revenue.
Example of Operations Trading Profits
Alpha 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 Alpha excludes the interest expense and gain on asset sale, resulting in a trading profit of $100,000.
Similar Terms
In regard to the operational form of trading profits noted above, trading profit also known as operating income.