How Do Stockbrokers Make Money, Explained in Detail

How Do Stockbrokers Make Money, Explained in Detail - Stockbroker with Trading Charts
Bill Cascade   NEW 26/07/2019 00:00:00 Guides

Whenever you buy or sell stocks, bonds, or mutual funds, you will need the services of a broker. Maybe you’ve wondered how stockbrokers actually make money? Well, here’s a couple of the ways they do it in their everyday roles.

A stockbroker has an extremely varied workday each time he or she steps into the office. Yet, a large part of their role is to work closely with their clients on their portfolios. This means advising them of the best ways to invest, and most importantly make money.

Stockbrokers Make Money Through Trades

Stockbrokers Make Money trough Trading - Trading Chart

All stockbrokers have a significant primary role. This is that of executing trades for their investors. Yet, to do this, they need to find those clients first that have assets to invest.

Once they have their clients, the hard work begins. They must work on forming a professional relationship with the clients. To start, this means requiring a minimum deposit to be used to open a brokerage account. This is similar to a bank account. Each time the stockbroker needs to make a trade, they will withdraw from this account.

Thus, each stockbroker will stipulate figures before a client opens an account. This means stating what their minimum deposit is. This is where they initially make their money. Average deposits tend to be around the $500 to $2500. Yet, it's not uncommon to find many stockbrokers quoting figures of as high as $10,000 as their minimum. Once clients begin their trading activities, stockbrokers charge a commission. This is for every trade they perform.

Once again, the exact amounts charged here will vary as per each stockbroker. These are what we refer to as percentage commissions. Such commissions are typical when the work involved requires higher value transactions. This is because the stockbroker’s role will require putting in more work for the deal overall.

Stockbrokers are Professional Financial Money Managers

 Professional Money Manager, Stockbroker, in the office, at the table

When a stockbroker trades for their client, they do so in two forms - a discount stockbroker or a full-service broker.

Discount brokers are those who do nothing other than executing their client’s trades. You’ll find that many online brokers are discount brokers. When a person trades online, the discount broker on the other end will make the transaction.

Discount brokers, thus, charge less per trade because of their reduced efforts here. This can mean anything as little as $15 or even $5 per trade.

Yet, those full-service brokers do more than just executing trades. They are also considered financial planners or professional money managers. This means they:

  • Meet with their clients in person
  • Undertake extensive market research
  • Develop clear investment strategies
  • Maintain portfolios that support such policies

 So, full-service stockbrokers can charge average commissions. This can range from anywhere between $100 to $200 per trade. 

Stockbrokers Can Levy Additional Fees 

Another productive way that stockbrokers make money is by charging operating fees. This is alongside annual maintenance fees. Also, a select number of stockbrokers place an inactivity fee on client accounts. This is chargeable if they do not make a trade for several months.

Some stockbrokers also place a minimum balance fee. This is should their client's broker account drop below a certain amount or level. 

Besides these, there may well be other fees a stockbroker will make their money from. An excellent example is that of flat fees. These are the many ways that stockbrokers can charge for a range of their services. An example here are stockbrokers who charge for stock trades made over the internet.

Another is for live brokers who charge a fee when they answer the phone and place trades for clients. It’s also worth highlighting that stockbrokers can charge both buyers and sellers. Or indeed both, if they choose to. So, it’s advisable that everyone approaching brokers fully understand this before committing. That is the fees and charges levied by your chosen stockbroker.

Stockbroker Types and Their Ability to Make Money

There are several different broker types. Each one can vary significantly in the amount of money they make.

Prestige Stockbrokers

These are the types of stockbrokers who work for those full-service broker firms. Examples here include Morgan Stanley and Merrill Lynch. This allows the broker to receive payments once they reach a certain earning level.

As an example, this can mean that should they earn $650,000, their payouts will equal around 41%. Yet, such figures will only come about when extensive training has been undertaken. Also, they will need to keep their positions and do this by meeting high sales quotas. Yet, the potential to earn massive amounts is possible here. That is if they can cope with high pressurized environments.

Independent Stockbrokers

These types of stockbrokers are the ones that often see higher pay-outs. Examples here are those such as LPL Financial. The potential to earn as much as 80% to 95% in some cases arises here. But, such independent broker-dealer types will also be responsible for their own expenses. They also do not have an office base to work from and will have to account for these expenses out of their own pocket.

Discount Stockbrokers

These types of stockbrokers offer the broker a chance to earn a salary. But this will be a flat salary. Examples of discount brokers include those such as Charles Schwab Corporation. Yet, this also means an ability to gather more knowledge and investment experience. This is because stockbrokers here will not just specialize in one area, but many. A less competitive workplace, it also means fewer quotes to meet. Thus, it’s less stressful. 

Stockbrokers Who Think Outside of the Box

Stockbrokers Thinking outside the box, 2+2=5, Another avenue for stockbrokers to make money is by having juniors work under them. This means getting trainees to open a specific number of accounts. These are for the stockbroker who has sponsored them.

Though this does mean training the junior broker and paying them a salary. If the junior stockbroker is then successful in their trading endeavors, then so too will the stockbroker be. Then, there's always an opportunity for stockbrokers to further enhance their earning capacity. This is by expanding the range of products they sell. This can mean applying for extra licenses. These will encourage more options or inventory for both existing and new clients. 

Final Thoughts on Stockbrokers and Their Ability to Earn

As with many financial job titles, being able to make money is primarily due to how well you perform. In the world of stockbroking, this does inevitably mean going that extra mile. It also requires working harder than most.

In concluding, you could very well say that being a stockbroker is almost akin to being a salesperson. Yet, overall, salespeople still tend to make more money per year than any other career path. So, this trading avenue really is food for thought.

Therefore, stockbrokers can make their money by building good quality customer relationships. They can also keep themselves abreast of all stock market news. But, their determination and perseverance may well be what determines their success. This will also dictate how much or indeed how little they will earn throughout their career. 

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