If you’re starting out in investing, you need to ask some essential questions. For example, you should know the answer to the question, “How do stock brokers make money” before you start trusting them with all your money.
What Is a Stock Broker?
A stock broker is basically someone who connects buyers and sellers of stocks. They’re the middlemen (and women) of investing, making money each time a client purchases a particular stock. It’s useful to remember stock brokers are salespeople, whether you’re thinking of becoming a stock broker for your own career or need to hire one.
Although plenty of financial salespeople are honest with clients, you don’t want to get duped. Some stock brokers are mainly looking out for themselves and their payday. Stock brokers aren’t necessarily bound to lead you in the most beneficial investment direction. Instead, they can focus on what makes them the most money.
Before we talk about how stock brokers make money, let’s look at what they do on a day-to-day basis.
A stock broker is someone who usually works for an investment firm and is continually seeking out new clients. They need to find people who have money to invest, and of course convince them to invest in certain products.
Stock Broker Education and Salary
To start this type of career, you typically need a bachelor’s degree, according to the Bureau of Labor Statistics. In addition, for anyone looking to advance in the field, earning an MBA (Master’s of Business Administration) is helpful.
The median annual salary for “securities, commodities, and financial services sales agents” was $67,270 in 2019. But of course, actual stock brokers’ salaries can vary a ton.
Stock Broker Tasks
A stock broker will often only promote products that bring them the greatest financial reward. That’s a big part of how stock brokers make money. Therefore, they won’t advise clients on purchasing investments through a competing company, but will stick to the one they work for.
By providing a high level of service, stock brokers can be very useful resources for everyday investors. They often do a large amount of investment and market research to determine the optimum times to buy or sell stocks.
So how to stock brokers make money? One way is by promoting certain financial products and investments to their clients. The clients then pay commissions and fees for managing those investments.
Although you’d hope anyone managing your money would put your best interests first, that’s not always the case. It’s common for brokers to push products that are more costly to the client and make better commissions for the brokers (ie. themselves).
A stock broker doesn’t oversee all of a person’s finances. For instance, they don’t usually manage your 401(k) or other retirement accounts. Instead, they focus on certain investments like stocks in the NYSE and Nasdaq.
Something that’s becoming more common these days is using an online stock broker rather than working with a live stock broker. This can simplify and streamline your investing process as well as save you money on expensive commissions.
Most stock brokers make much of their income through commissions, or fees clients pay them when they buy a certain product. When clients purchase investment products, they often pay either a flat fee for each trade. Sometimes it’s a percentage of the transaction’s dollar amount.
Some stock brokers charge a set fee such as $50 or $100 per trade on stocks, bonds, or mutual funds. These are pretty easy to figure out: their company information will state that you pay X amount per trade across the board.
In other cases, stock broker earnings can be a bit harder to recognize. Motley Fool explains that if mutual funds carry a “sales load,” this means an amount that the broker deducts from your investment.
Types of Mutual Funds and Fees
- Class A shares: charge a front-end sales load. For example, if you invest $30,000, the broker may deduct $3,000 immediately, making the investment actually only $27,000.
- Class B shares: no up-front commissions. But these may charge a back-end load if you sell before the required length of time.
- Class B assets: charges a 12b-1 annual fee
- Class C shares: no up-front charge, but a percentage in maintenance fees
In addition to being aware that some funds carry a load, you can choose wisely by asking about no-load funds. A stock broker is less likely to direct you to buy these types of investments since there’s little financial incentive to the broker.
A stock broker is also different from a registered investment advisor (RIA).
RIAs generally charge a fee equal to a percentage of the monetary assets they manage for clients. The Securities and Exchange Commission (SEC) hold them to a higher standard. In other words, RIAs have a fiduciary duty: they must always put the client’s best interest first.
In the personal finance space, a lot of people use discount stock brokers, which you can find online. These types of stock brokers charge much less than a traditional stock broker that works for an investment firm.
Many online stock brokers, including Charles Schwab, actually charge zero commission on stock trades. That’s a massive bargain when you consider a traditional stock broker might charge $100 or more to perform the same trade.
If you intend to make frequent transactions and trades, all those zero fees will save you a lot of money.
$0 Commission Trades
Other companies like Interactive Brokers, Ally Invest, and ETrade offer investments at $0 commissions per trade. They haven’t always done so.
But how do stock brokers make money from a discount online platform? This largely comes from a high volume of customers who may use other financial products that come with a cost.
What’s Right For You?
Now, what if you are someone who really prefers working with an actual human being on managing your investments? Then a discount broker probably won’t be the best choice for you.
While you can do tons of research on your investments online, not everyone is interested in taking the time to do that. And you might simply feel more comfortable taking some guidance from a trained professional.
In that case, spending more for the advice of a traditional stock broker might actually be in your best interest. Just be sure to remember they don’t necessarily have to steer you towards the best investments for you, so proceed carefully.
Do you prefer working with a real stock broker, or managing your own investments through a discount brokerage or robo-advisor?
AUTHOR Kate Underwood
Kate Underwood loves reading, talking, and writing about all things in personal finance. She made the switch from her high-school teaching career a few years ago to become a full-time freelance writer and editor and can be found at kateunderwoodwriter.com.