Every day, stockbrokers in the United States make a number of trades. They’re in charge of buying and selling stocks with an eye to increasing their profits. But how do they make their money? And how much do they earn? Read on.
Who is a Stock Broker?
Before we go into the details of what the average stockbroker earns or how stockbrokers make their money, let’s talk about what a stockbroker is.
There are two types of stockbrokers. The first is the independent stockbroker, who is paid directly by the client to do their job. The second type of stockbroker works at a firm that deals in trading stocks for clients. This kind of broker earns money through commissions that are negotiated upfront, along with other deals for his or her employer.
Stock Brokers Who Work For Firms Are Called “Advisors”
The term “stockbroker” itself has changed since the days when people used to trade stocks in person in public places like Wall Street in New York City. Today, most stock trades occur digitally, and the person who makes the trade is an “advisor” or “financial advisor.” Stockbrokers today advise clients about their portfolios and help them make purchases and sales for a commission.
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How Do Stock Brokers Make Money?
It’s all about commissions. The commission a stockbroker earns is a percentage of the total value of a transaction. What’s interesting is that commissions vary by industry and time of day. The commissions for stocks change based on the average daily price. So, brokers earn more money from stocks at higher prices. Stockbrokers also earn more money when they execute trades during the morning.
In truth, stockbrokers don’t actually make any money themselves—they charge a commission from the people on the other end of their trades (ie, people who they trade for or people who hire them to trade their money). In most cases, this is usually around 1% of the total value or amount being traded.
Here is an example: if you have $100 to invest and decide to buy 10 shares for $10 each, your broker will charge a commission fee of $1.
A broker charges a commission of approximately 1% of the value or amount being traded.
Now, there are brokers that charge less—but this is an industry-standard. Many individual investors don’t realize they are being charged a commission to trade stocks, so it would be safe to assume that most stockbrokers actually charge their clients 1%, or even more. But how much? And what’s the average commission rate for stock trading? For answers to these questions, we turned to The New York Times.
The SEC surveyed companies in the U.S., including brokers and investment advisers, broker-dealers, and mutual funds to collect data on commissions paid each year by firms for trades executed by their customers. They found that the average commission paid was approximately $9.60. This breaks down to a little over 4% of the value being traded, although these numbers have been on a steady decline in recent years.
The New York Times surveyed several firms and they all said the same thing: commissions are declining.
There are many reasons for this decline in commissions, including that there has been a shift from human stockbrokers to online brokers. For instance, Charles Schwab was one of the first companies to offer online trading, and they charge around $5 per trade—which is significantly cheaper than a typical broker with a brick-and-mortar location who charges upwards of $50 per trade.
Interestingly enough, Schwab didn’t start out as an online broker. It was started by Charles R. Schwab who opened a discount brokerage firm in 1973. Schwab Bank was spun off in 1994, but the company remained focused on discount stock trading until 1997, when they launched their first online brokerage service called StreetSmart. They then launched their “zero commissions” program in 1998, which allowed people to trade stocks without paying any commission at all.
How Much Do Stock Brokers Earn?
The average stockbroker makes an average of about $100,000 to $150,000 a year, according to the Investment Company Institute. However, that number represents commissions that are paid out depending on how often they trade stocks during the course of a year. Brokers who trade less often make less money per transaction. But even with these numbers, stockbrokers are far from being overpaid for their services.
While it may seem like “easy money” to some people, being a stockbroker is actually a very stressful job. People are constantly calling brokers with questions, and there are thousands of dollars at stake every time they make a trade with an investor’s money.
When most people think of stockbrokers, they imagine someone who spends most of their day at the office sitting behind a desk with their feet up. The truth is that most companies have replaced the term “stockbroker” with “advisor”, which means that these people work from home via computer.
Stockbrokers are on call 24/7, 365 days a year.
What’s more, the hours are longer than you would think. Most stockbrokers put in an average of 40 hours of work per week (although there are some who go over 50). It’s not uncommon for stockbrokers to get calls from clients at midnight or even 3 AM. And since stock trading happens 24/7, there is always someone calling with a question or to make a trade.
So while the average stockbroker may make $100-150k per year, most of that money does NOT come from their paycheck—it comes from the commissions they collect when they trade on behalf of their clients.
So, Do Stock Brokers Earn good money?
Yes… But not nearly as much as you would think. The average stockbroker makes around $100k to 150k per year.
In terms of income, not only is being a stockbroker not a bad job for most people, it’s a great one for many of them—especially if they’re highly motivated and work a lot. It’s a job that requires some time and effort to get started but offers an incredible amount of potential income if you put in enough work. So, while the average salary may be “low”, the potential to make a lot more is very high—especially if you stick with it and work hard.
What about Commission free brokers?
Commission-free brokers are often seen as a scam, and it’s true that there are some shady brokers out there—mostly on the internet. However, if you do some research you can find a reputable broker who will help you start a profitable business with a low minimum investment.
The truth is that no stockbroker is going to have zero commission, even if they say they do. You may be able to find some commission-free options that work out of an email or from the phone, but basically, all brokers at least charge a few dollars per trade.
So if you’re considering trading stocks as your side gig, remember that many traders make money trading stocks without paying commissions by trading penny stocks and penny shares with spread betting firms.
What do Stock brokerage firms do?
Stockbrokers help people achieve their investment dreams by helping them choose the right stocks, manage their investments, and make money on their trades. Stockbrokers can also help beginners get started with investing–all it takes is knowledge about the market.
Brokers are like teachers in that they teach you about investing… but instead of doing it directly, they do it behind the scenes. They do all the work of finding stocks that are worth buying and selling them for profit, but this doesn’t seem like an easy task to most people.
To convince investors to take on their advice, stockbrokers must sell based on their own experience or knowledge (something that they know has worked in the past). That’s why brokers earn their living by doing the research and finding the best stocks to buy on your behalf.
A stockbroker who works in a brokerage firm does exactly what you would expect: they find stocks or other investments worth buying and selling and then, buy or sell them for you on your behalf. If you’re an experienced trader and don’t want to spend time doing research of your own, a stockbroker can help by picking stocks that others have already made money with. This is often called “matching” or “matching-selling”. They sell stock that has already been proven successful, making transactions of this type much easier than having to pick one out on your own.
How do brokerage firms make money?
Brokers in the U.S. earned a total of $40 billion in commissions last year. Most brokerage firms earn their money from two sources: commissions and management fees. Brokerage firms earn commissions by taking a percentage of each trade that is made with their clients’ money (the amount they get depends on the broker, but it’s usually between 4-6%).
They make management fees by harvesting investment assets and collecting investment income from those assets for managing for clients.
Understanding how stock brokerage firms make money is important because it will help you take stock and your options when investing your own hard earned cash—whether that be through stocks, bonds or mutual funds.
How to become a Stockbroker
If you’re looking to earn your bread by trading stocks, then you should know that stockbroker is just one of many career paths you can take. The first thing you’ll need to do before beginning the process of applying to brokerage firms is learning the basics of financial markets and accounting. Once you know the fundamentals, you can start your application process by taking two exams:
1. The Series 7 Exam.
This exam is required for all stockbrokers, regardless of who they work for. It tests your understanding of financial markets and securities laws, as well as how to handle client accounts. Passing this test will allow you to become registered with the Financial Industry Regulatory Authority (FINRA). You can then look for a job as a stockbroker.
So you’ve got the Series 7—what’s next? Let’s say that you’ve just finished passing your RIA exams and now want to start applying to brokerage firms. Your first decision will be what type of securities firm you wish to work for. There are three types of stock brokerage firms: discount, full service, and online/internet-based.
2. The Series 65 Exam.
This is the exam that you will need to complete if you plan on becoming a registered investment advisor (RIA). Becoming an RIA allows you to manage money for other people—like a stockbroker, but with less paperwork.
After passing your Series 65 exam, the next step would be to send in applications to brokerage firms and RIA firms that are hiring. While your ultimate goal should be to land a broker job at one of these establishments, keep in mind that due to the recession, high unemployment rates, and increased competition for jobs in the financial sector many firms are simply not hiring right now.
Tips for success for Becoming a Broker and earning a lot of money
- Your approach to learning will make a huge difference in your ability to succeed in the investment banking path. If you’re a light sleeper, then you should start investing very early on when you can afford it. It’s much easier for novice investors to track everything they do and understand how it affects their investments with a small account until they have a substantial amount of money.
- Work at multiple firms so that no firm will have all of the knowledge of your weaknesses which could lead to poor performance in the future. The most successful people have at least one foot in each camp, not just one job experience. So it pays to know as much as you can about the different types of firms that are out there.
- Be prepared for a lot of work. Just because they call themselves “discount” stockbrokers doesn’t mean that doing research isn’t part of your job. Just be sure that you’re taking on less risk due to your experience and knowledge of how risky certain stocks are… or at least invest in mutual funds or ETFs with lower fees so you don’t have to worry so much about economic downturns affecting your investments.
- Don’t be discouraged if people tell you that stockbrokers are not the best. I’ve seen a lot of people who knew a lot more about financial markets and investing than I did walk out of their interview asking, “Why didn’t I get the job?” The reality is that it takes a lot of knowledge and experience to be successful as a stockbroker.
- It’s important to understand your clients needs before you can sell them anything. Unlike salespeople, stockbrokers don’t make any money until they take a commission from your trades.
Is Stockbroking Still A Lucrative Profession Today? How Commission-Free Trading Affected Stockbrokers
The financial industry has changed significantly since the commission-free trading era. The cost of managing money has plummeted, which means that people are buying more and investing less. While this is good news for their personal finances, it’s bad news for brokerages because traditional brokerages found themselves in the middle of the “dot-com bubble”.
The boom at brokerage firms was so big because people were so laid back about their investments. But when the Internet bubble burst and people quit paying brokers, that was the final death knell of traditional brokerage firms.
What did this mean for stockbrokers? A huge loss in jobs and a whole new industry. Let’s talk about these new industries that have emerged in the wake of more people managing their own money on the websites of discount brokerages.
How are things different today?
Communities have formed around discount brokerages because people don’t pay commissions on their trades, so they need to manage their finances themselves. This has led to the development of communities where people share ideas about which stocks you should buy and sell—and what strategies you can use to get more out of your investments. Some of these communities have thousands of users while some have dozens or even hundreds across the globe.
For example, you might have friends on Facebook that are managing their own portfolios, but what you don’t know is that your friends are actually part of a larger community. Think about how many people you’ve “friended” on Facebook who are also managing their own investments. Now think about how many additional people they have indirectly introduced you to. That’s the power of social media for stockbrokers.
Social media also makes it easier for PE firms to reach out to stockbrokers since almost every stockbroker has a Facebook or LinkedIn page. This means that if you reach out to a company through your social media sites, they’ll be able to work with your firm directly through your page.
Other industries have also appeared in this new marketplace, including websites that promote themselves as brokerage houses for major banks—like Yahoo! Finance—and others that review personal portfolios for free or charge small fees for their services. Finance bloggers are now able to make money by posting “sponsored” posts on their blogs, which are paid for by the companies whose products they are reviewing.
So does it still make sense to become a broker in today’s world?
While the industry has changed a lot since the brokerage houses started losing business to the dot-com boom, they’re reinventing themselves. Do stockbrokers still make money today? Absolutely.
But is it still considered a lucrative profession? Yes it is in most markets outside of the U.S., which means that you’re more likely to be able to make money doing what you love than in the U.S. Yet, don’t let this deter you from looking into becoming a broker in the U.S.—the decision to invest in stocks or bonds isn’t based on whether the markets are up or down, but on which is more profitable in your particular state, region, and country at any given time.
The Bottom Line
Stockbrokers are paid well for their service. The average stockbroker makes around $100k to 150k per year. But the truth is that most stockbrokers don’t make that much, while a few others earn way more than that.
If you want to start a profitable stock brokerage business then it’s going to take a lot of time and effort—and even then, the pay will probably be lower than you would expect, especially at the beginning. If you’re not willing to put in the work to make it profitable, then starting a brokerage business is probably not worth your time or money.