Everyone wants to become a millionaire on Wall Street, and if you were to trust Hollywood movies, the first career option you would consider would be to become a stock broker. Supposedly, they help clients make lots of money while making a fortune for themselves. But do stock brokers really make good money?
Stock brokers make good money and can become millionaires, provided they make lots of profit for their investors. Apart from relying on commissions, brokers can also make money through compensation from market makers, interest income, and offering other premium services.
Of course, you may not become a millionaire immediately when you start, but you can after building a name for yourself and gaining high-value clients. This article will explore the duties of a stock broker to give you a better understanding of how they earn money. It will also look at the effects of commission-free trading on stock brokers and the different channels stock brokers use to make money.
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Table of Contents
What Are the Duties of a Stock Broker?
To better understand how a stock broker makes money, you should first understand what responsibilities they hold when executing their tasks. A stock broker is a financial expert that helps clients to buy and sell securities.
Although people identify them as stock brokers, they also deal with other popular financial instruments such as mutual funds, pension plans, and bonds. To put it simply, they act as a middleman between a brokerage firm and an investor, executing transactions for the investor.
You can either become a full-service stock broker or a discount stock broker.
Who Is a Full-Service Stock Broker?
A full-service broker offers more premium services apart from the buying and selling of securities. They can provide an in-depth analysis of your portfolio, financial planning, and wealth management services.
Investors identify full-service stock brokers for their financial expertise. As a result, they are the preference of many investors that want to invest a considerable amount of money. To become a full-service broker, gain enough experience by working in a full-service brokerage firm.
Only then will you adapt to the pressure of meeting high sales quotas within a short timeframe. With enough experience, you can now become an independent broker and find your own steady clients. Another option would be to start your own full-service investment firm.
Who Is a Discount Stock Broker?
Discount brokers only help clients to buy and sell securities. They do not offer any investment advice or conduct research and financial planning on the client’s behalf. Their job revolves around executing orders for their clients. Since they do not offer extra services, they offer very low fees.
Usually, the interaction between an investor and a discount trader is to a bare minimum. Unlike full-service stock brokers, discount brokers do not face high sales pressure when working for a brokerage firm. Most of these firms operate on online platforms and attract plenty of investors with a small capital and trade for lower fees.
Do Stock Brokers Make Good Money?
There is no difference between stock brokers and salespeople. Their goal is to make as much profit as they can through incentives and commissions. Brokers earn a commission once they facilitate the sale or buying of securities.
Therefore, the more transactions they facilitate, the more they earn in commission. A full-service broker’s average transaction fee is $150, while that of a discount broker is $10. While a stock broker’s goal may be to earn as much money as possible, it should be within the legal reigns.
Stock brokers have a fiduciary duty to put the interest of their clients first before theirs. You should not violate your client’s trust and create opportunities for investment fraud with the goal of earning more money.
Relying on illegal practices to make money may not be durable. With time, you will lose your reputation and with-it clients to work with. However, you can take a longer and more worthwhile route of first building your career and reputation.
With time, you can get high-value clients that pay much higher commissions. The amount of money you receive may differ depending on your location and type of brokerage firm. Usually, most firms give stock brokers a base salary and a commission for all their transactions.
Steps to Becoming a Stock Broker
According to the latest data in the market, stock brokers can earn a salary of up to $136,000 per year with the ability to scale up to a higher figure. This amount does not account for how much you can receive every month or how much of it comprises commissions.
To get to such a level, start by working in a brokerage firm as a trainee earning a basic salary. Only then will you grow your experience and become a full-fledged stock broker. The company you are working with might also opt to sponsor you to take the license exams.
Stock brokers with a license and plenty of experience points have more opportunities in the market and can earn more from commissions, incentives, and bonuses.
There are three essential steps you have to qualify to become a licensed stock broker:
- Have a college degree. You need to have a college degree to get hired by a brokerage firm and gain experience. A recommended degree is in business, economics, MBA, or finance. You can still start as an intern if you are still a student.
- Receive a FINRA exam sponsorship. You can only receive a stock broker license after taking the FINRA exam. However, you can only take the exam when a FINRA-associated firm offers you a sponsorship.
- Pass the FINRA exam. Your firm can provide you with plenty of materials that can help you pass the licensure exams. Therefore, make the most of the opportunity as a trainee in the company.
What Are the Effects of Commission-Free Trading on Stock Brokers?
The emergence of internet businesses had a significant impact on the normal operations of brokerage firms. With new websites and financial apps popping up everywhere, stock brokers lost their control over the flow of money in the market.
Here is a video explaining the meaning of commission-free trading:
Investors can now buy and sell securities without dealing with a human agent. As a result, many brokerage firms cut commission on trades to draw more millennial investors.
But does getting rid of the commission not affect the revenue a stock broker makes? Well, there are different ways a stock broker can make up for the lack of commission. Such include:
Earning Income From Interest
If there is money in a brokerage account that is idle, a stock broker may offer interest on that cash to the investor. But the money does not always remain inactive in the account. The broker invests it in a low-risk bond or government-backed security where they also earn a bigger interest than what they are offering you.
Interest income makes up a significant percentage of revenue, especially for a discount stock broker.
Payment of Order Flow
It refers to the compensation market makers pay to the broker for allowing them to facilitate a trade. When an investor makes a trade, a broker has several markets to choose from to execute the trade.
Their best option is choosing a market with low risk and reasonable prices. Market makers help them execute trades at a price better than those of the public market.
In return, they pay a commission to the broker for allowing them to take advantage of the price difference in the markets.
Premium Services
Some brokers make money by selling premium services such as upgrades to free products and extra financial services. The amount they charge varies between brokers. It does not accrue much revenue, but it still is important for discount stock brokers.
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Conclusion
While the opportunities to make money as a stock broker today are not as plentiful as they were decades ago, you can still become a millionaire from the trade. Still, there are several factors you have to consider if you want to be successful in this field:
- You need to have a license and plenty of experience
- Build a decent client base
- Maintain your reputation by being trustworthy
You may not become a millionaire overnight, but with enough determination and hard work, you can make as much as you want.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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