Brokers vs. Traders
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Without brokers, the need for traders would cease. Without Wall Street, traders wouldn’t exist.
Confused? Don’t be. Brokers and traders both work in finance, they win and lose on Wall Street, just not always at the same time.
Agency Trader (Brokers)
An agency trader is also known as a broker that handles client orders. They, in fact, act as a go-between as a third-party agent between Wall Street and the client.
So, technically, an agency trader is a broker. Throughout this guide, for clarification, we’ll refer to agency traders as brokers. They’re more easily recognizable by that term, especially if you’re new to the world of financial investing.
Brokers are heavily involved in sales if they work for themselves or a brokerage or securities firm. They have regular customers.
Proprietary Trader (Traders)
Traders take their investment management firm’s money, usually a bank, and invests it, but the trading decisions are left to the proprietary (also referred to as prop) trader. The trader’s client communicates their firm’s financial goals.
Traders work with hedge funds and are also found at trading firms that exclusively conduct prop trading. Although the technical term for a trader is proprietary or prop trader, we’ll refer to the name as simply trader throughout this guide to simplify things.
It’s important to note that there are different types of traders in addition to prop traders. Discretionary traders make research-based trades.
Day traders trade on the foreign stock exchange (forex) and various stock markets as well as other types of marketplaces. They buy and sell quickly by using strategies for fast, short-term trading.
Day traders execute many trades in a single day. System traders use automated programs run by computers to make trades.
Traders can take direction from a portfolio manager within another firm. If that’s the case, then the trader would trade based on what the firm wanted. In many cases, traders work for themselves and create an investment strategy for a firm.
What’s more, if a trader works for a tiny firm, instead of trying to compete with larger brokerage firms and banks, they’ll focus more on creating profitable methods for making trades where there’s the least bit of resistance.
In other words, they’ll come up with strategies based on their strengths, all with the goal of obtaining the most profits for the company they work for. But just like brokers, traders can work independently too.
The Misconception of the Outgoing Trader Personality
Day traders are often considered extroverts because they’re portrayed as frantically trading on the floor. Many traders contact brokers to execute trades. Traders like the idea of the unlimited moneymaking potential.
Snap decisions can turn into large dollar profits in an instant. It’s true, that traders are outgoing, but so are brokers.
Brokers make it all happen for the trader. Many consider them to be more behind-the-scenes. The reality is that brokers must be outgoing and communicate with their clients daily. Without brokers, many trades just wouldn’t happen.
If you’re in the management consulting or investment banking industry, teamwork is necessary. Interestingly enough, all traders don’t have to truly be team players.
They’re more likely to be math enthusiasts because they enjoy working with numbers. It’s a performance-based industry of trading where looks don’t matter, results do.
Brokers are dedicated to maintaining a financial relationship with traders, and trusting the union of making money with them is a broker’s long-term goal. They’re in it for keeps.
That’s because retaining quality clients and getting a lot of them is key to a broker’s success. Smiling while on the phone pays off.
Brokers do know where the best place in the city to grab a bite to eat. Most importantly, they have a lot to say about trades and it translates into profits for traders and themselves. The handle mutual funds, equities, and Exhange-Traded Funds (EFTs) for their clients.
We focused on brokers vs traders in the stock market, but brokers and traders can equally offer services as financial planners, diversified portfolio managers, and financial advisors for real estate and wealth management for their retail clients or trader clients.
When traders don’t call brokers, brokers are taking the initiative to call traders. They keep their clients alerted when stocks rise and fall.
They present opportunities for their current clientele. Brokers also make cold calls and hold investor topic seminars to expand their customer base.
Brokers take a commission for each trade made for the orders they execute for their clients. It is usually a set amount per trade.
Regardless of what the stock sales for, a broker will get a commission when the trade is executed. To make money, they must sell securities, large blocks of them.
Therefore, they need a lot of investors who are willing to buy and sell so they can make lots of money. Many online brokerage firms are doing away paying commissions on trades. For example, the popular investment firm, Charles Schwab eliminated its trading commission rates on October 7, 2019, for online ETF trading.
A discount broker charges less than a full-service broker because a discount broker’s primary concern is to execute the trade. Their per-trade fee may be as low as $15 or even less, around $5.
Some online discount brokers offer more services such as financial planning but don’t offer as much as a full-service broker. In that case, those in-between would charge for each trade between $15 and $30, typically.
Compare those discount brokers to a traditional full-service broker who offers portfolio management and develops a profit formula, something that a financial planner would do. The per-trade commission range is $100 to $200 on average.
Today, you’ll see some online full-service brokers that cater to discount trades and they’ll charge a lower per-trade rate for that service. They’ll try to grab as much as the brokerage market. The one thing all brokers have in common is they charge a fee per trade and that’s how they mainly earn their commissions.
By contrast, traders take their commission as part of the profit from the trade. Well, per-share stock prices vary widely. This can be good or great.
For example, trading 1,000 shares at once may generate more of a profit for a trader than a broker earns from a commission fee on the same number of shares.
Fees for Account Maintenance
Brokers can charge fees for inactivity if a client doesn’t execute any commission-based trades within 12-months time.
Traders create brokerage accounts, so they aren’t charging fees unless they’re offering different services and charging fees for those.
Brokers charge interest rates known by margin rates in the investing industry. An investor client who wants to borrow from the broker to fund a brokerage account will be charged margin rates. It’s based on the balance of the loan and the brokerage firm’s base rate that they set.
Some brokers charge a monthly fee to provide data in real-time, while others include the service in their clients’ accounts.
Traders, on the other hand, don’t normally charge margin fees or fees for generating data since they are employed by a firm and take directions from a portfolio manager. Some traders obtain a fixed salary in addition to commission compensation. Many traders thought are performance-based and therefore, rely on commissions.
Banks employ brokers and so do brokerage firms. If an agency is really small, a broker will act as a third-party agent, just like a small prop trading agency would do. Both brokers and traders behave as middlemen especially if their firms as small.
Many brokers require a deposit of at least $500 into a brokerage account. It can go up from there to about $2,500 or even higher to $10,000 as the minimum required.
Traders Create Action Plans
Traders often prepare for a trade long before it happens. They take a hands-on approach and conduct their own research, devising investing strategies so that they know exactly how, when, and where to buy stocks when the time comes. They use computers extensively for preparation in making timing-based trade decisions.
A large component of the prep work involves equity analyzing, as well as evaluating commodities, forex, and related derivatives. Traders think up ways they believe would be most profitable for the agency, and then proceed to implement those plans. The end result of a lucrative financial outcome is great, and the work is intense and fun.
Each trader’s day is unique because they can take on different roles. Some may work the floor and speak to other traders about what the market is doing and what it’s about to do. Those traders stay connected to a trading team when they’re not using their computers to devise solutions for their company.
Brokers are Connection Makers
Stating that Brokers support traders on the backend is an understatement. Brokers don’t get coffee for their trader clients; however, they’ll meet to discuss opportunities over it.
They are revenue-making financiers in the sense that they execute the transaction when a trader calls them up and says, “I’ve decided that I want to sell/buy x shares of this stock. Can you do it?” The broker’s incentive is thinking about the commission for turning the request into a reality.
To increase the amount of the commission, the broker can contact clients that might be interested in selling or buying some shares that the other client wants to buy or sell. Otherwise, the broker will buy or sell on the Exchange. The more profits, the better.
The Hours that Brokers and Traders Work
Brokers and traders have similar work hours. They’ll each put in between 60 – 70 hours weekly. On the daily, the market opens at 9:30 a.m. and ends at 4:00 p.m.
Eastern Standard Time (EST). Traders and brokers start their day between one to two hours before the opening of the market and stay about a couple of extra hours after the market closes. Brokers arrive earlier and stay longer than traders just in case they need them.
Which Role Makes More Money, Trader or Broker?
The question on everyone’s mind… and the anwswer is:
It depends. Both professions can be lucrative.
The money focus tends to be on the few highest-ranking traders. That’s not representative of the lifestyle of the average trader.
There’s a flip side to every win and loss in trading. What makes a difference is a clientele, services offered, stock market knowledge, and luck.
Brokers on average make money off of commissions and do it with a lower risk than traders put forth. After all, it is trading firm’s money that the broker works with. The lifestyle of a broker who has hundreds of clients isn’t hurting in the greenbacks.
Brokers vs traders? Well, it’s not necessarily an apples to apples comparison.
Brokers and traders are high-powered, high-energy people. For a broker, the roles are sometimes blurred into several broker-trader mini-roles.
They can overlap where the broker can take on some full-service trader roles or go the other way and only execute trades. It’s nice to dispel the myth that brokers are loners.
In fact, they are more extroverted than most people may have originally thought. They rely on traders because they make the decision to proceed with the trade.
Traders, on the other hand, are the ones who strategize about what and how to trade. Brokers do that too, but their attention is mainly concentrated on increasing everyone’s money-making potential so that everyone can benefit and grow their clientele.
So, to recap, traders and their portfolio managers focus on what are the best trades to make. When they figure that out, the broker strives to execute it amazingly.