Stock Trading Profit: Beyond Buy Low, Sell High
Calculating stock trading profit seems simple—subtract purchase price from sale price—but properly accounting for all costs, taxes, and holding periods reveals the true economics of stock investing.
A stock purchased at $50 and sold at $60 shows a $10 gross profit, but after $10 in trading commissions and 24% capital gains tax ($2.40 on the $10 gain), your net profit is just $7.60, a 15.2% return instead of the apparent 20%.
Modern discount brokers offer commission-free trading, but other costs remain: bid-ask spreads (the difference between buying and selling prices, often $0.01-0.05 per share on liquid stocks), SEC fees (small regulatory charges), and margin interest if buying on leverage.
The holding period dramatically affects taxes: short-term capital gains (assets held under one year) are taxed as ordinary income at rates up to 37%, while long-term capital gains (over one year) are taxed at preferential rates of 0%, 15%, or 20% depending on income—this can mean $3,700 in taxes on a $10,000 gain (short-term) versus $1,500 (long-term), a $2,200 difference.
State taxes add another layer, with high-tax states like California charging up to 13.3% on capital gains.
Transaction timing matters for year-end tax planning—tax-loss harvesting (selling losers to offset gains) can reduce your tax bill, while the wash-sale rule prevents claiming losses if you repurchase the same stock within 30 days.
Dividend income further complicates returns: qualified dividends are taxed at long-term capital gains rates, but non-qualified dividends face ordinary income rates.
The annualized return calculation accounts for time: a 20% return in 3 months is far more impressive than 20% over 3 years (84% annualized vs.
6.3% annualized).
Risk-adjusted returns consider volatility—two stocks with identical returns but different volatility have different risk profiles, measured by Sharpe ratio or standard deviation.
Professional traders track additional metrics: win rate (percentage of profitable trades), profit factor (gross profits / gross losses), and maximum drawdown (largest peak-to-trough decline).
The most common mistakes retail investors make include: ignoring transaction costs when day trading (costs compound quickly with high frequency), not accounting for taxes in performance calculations, comparing nominal returns without adjusting for time or risk, and making decisions based on percentage gains without considering position size (making $1,000 on a $100,000 position is very different from $1,000 on a $5,000 position).