How Do Stockbrokers Make Money And Can You Still Make Money By Being One Today?

Stockbroker watching trades

Becoming a Wall Street millionaire is something many people dream about and if Hollywood movies are to be believed, the easiest way to get a penthouse in Manhattan and drive that sleek Aston Martin is to become a stockbroker. Stockbrokers are often portrayed as flashy, tenacious executives who drink champagne for breakfast and make gazillions of cash like Jordan Belfort aka The Wolf of Wall Street. They are supposedly financial gurus who can help people make money while making a lot of money for themselves at the same time. But how exactly do they do that? Do stockbrokers still make a lot of money today?

If you’re interested in becoming a stockbroker, you might be surprised that it’s not as easy as it seems. Many finance articles say that all you need is to have the drive to succeed but in reality, you need a lot more than that. You have to go through a certain process to start working as a licensed stockbroker in America. Read on to learn more about this career and if this is the right choice for you.

What Does A Stockbroker Do?

If you’re wondering how do stockbrokers work, you have to understand the main job responsibilities of one. A stockbroker, also called a trader or an investment broker, is a professional who buys and sells shares on behalf of clients. A stockbroker helps clients purchase stocks, securities, bonds, and other financial products from the exchanges like the New York Stock Exchange, Nasdaq, London Stock Exchange, etc. To put it simply, a stockbroker is a middleman that executes transactions for someone who wants to invest. 

There are two types of stockbrokers: full-service stockbrokers and discount brokers. A full-service stockbroker is someone who offers a more extensive service than just helping you with the buying and selling of stocks. This type of stockbroker can review your portfolio, offer financial advice, and give you direction on the best investments to put your money in.

Usually, people who are new to investing or those with a considerable amount of money to invest prefer to work with full-service stockbrokers because of their financial expertise. If you want to become a full-service stockbroker, you typically have to start and train in a full-service brokerage firm to know the ins and outs of this role. After years of experience and gaining a good number of steady clients, it is possible to become an independent full-service stockbroker or even start your own full-service investment company.   

A discount stockbroker, on the other hand, will only provide transaction assistance. They will not provide investment advice or tell you whether you’re making a wrong investment decision. The job of the discount stockbroker is to execute the trade for you and nothing else. Discount stockbrokers are ideal for people who do not need any financial advice or those who just need to get the exchange implemented. Discount stockbrokers work in discount brokerage firms and many of these firms are often found online.

How Do Stockbrokers Make Money?

Stockbrokers are essentially sales people. They make the big bucks through commission and incentives. When a client buys or sells stocks through a stockbroker, they will be charged a fee or a commission for the transaction. The more stocks stockbrokers trade, the more money they earn in fees or commissions. Full-service stockbrokers are paid an average fee of $150 per transaction, while discount brokers are paid around $10 per transaction.

Of course, if you are just starting out, it is not going to pour dollars on month one. You have to build your career first and acquire high-value clients to get into the big leagues. Depending on the location and the type of firm you work for, the amount of money you can potentially earn will differ. A stockbroker will usually be paid a minimum base salary and will earn commissions on top of that. So, how much is a stockbroker salary?

Stockbroker Salaries In The United States

According to ZipRecruiter, the average salary of a stockbroker in the United States in 2020 is $136,000 per year. While this may seem like quite a lot of money, the site also shows that there are stockbrokers who only earn around $14,000 a year. The good news is that there is an opportunity to scale up as you can earn as high as $399,000 annually. These salaries, however, do not indicate how much of this amount is guaranteed per month and how much comes from commissions.

For a person who wants to break into the industry as a stockbroker, you usually have to start as a trainee. This job is for people who haven’t taken the required licensure exams yet to become a licensed stockbroker. As a trainee, you will usually get a base salary especially if you’re starting out with zero clients. The company will teach you what you need to know to become a full-fledged stockbroker and also sponsor you to take the required license exams.

A quick search on the available stockbroker trainee jobs in 2020 will give you an idea of the salary you can expect. One job posting in New York, New York looking for a stockbroker trainee listed down a salary range of $30,000 to $60,000. Another job posting by a company in Melville, New York pays $27 to $30 per hour for stockbroker trainees.

If you are a licensed stockbroker with at least 3 years of experience, the available job listings in New York and California show that you could expect a salary of $120,000 to $150,000 per year. Again, these job listings do not indicate how much of that amount will come from commissions or incentives.

One available job posting from an established Wall Street investment firm, however, gave a clearer view of how licensed stockbrokers working for them will make money. According to the job ad, experienced stockbrokers will be paid a base salary of $50,000 a year. On top of this base salary, the stockbrokers can also earn commissions, incentives, and bonuses that could lead to a six-figure salary with full-time employees earning $100,000 to $250,000 per year. Based on this particular job ad, it shows that to earn a lot of money, stockbrokers still make the bulk of their earnings from commissions.

How Do I Become A Stockbroker?

Becoming a stockbroker is not an instant process. Just because you’ve dabbled in online trading does not mean you can be a qualified stockbroker overnight and earn millions of dollars. To become a licensed stockbroker in the United States, you have to go through the following steps.

Becoming a stockbroker is not an instant process. Just because you’ve dabbled in online trading does not mean you can be a qualified stockbroker overnight and earn millions of dollars. To become a licensed stockbroker in the United States, you have to go through the following steps.

  1. Get a College Degree – Having a college degree is ideal if you are looking to get hired by the major investment firms in the country. A degree in finance, business, or economics is recommended. If you have an MBA, it can give you an edge over other candidates. If you are a student, it will also help if you apply as an intern in a brokerage firm to get experience.
  2. Apply as a trainee and have a company sponsor you for FINRA exams – To become a licensed stockbroker, you have to pass the Financial Industry Regulatory Authority or FINRA exams. However, you cannot take the FINRA exams without a sponsorship from a FINRA-associated firm.
  3. Take and pass the exams – When you get accepted as a trainee, many companies offer training programs and materials that can help you pass the licensure exams. The common exams stockbrokers take include Series 7, 63, 3, 31, 65, and 66.

If you are already working in the finance or banking industry with a college degree and you want to switch careers as a stockbroker, you may still need to start as a trainee. While you may have a slight edge as you are already familiar with the industry, you still have to get a sponsor firm and take the licensure exams.

Is Stockbroking still a Lucrative Profession Today? How Commission-free Trading Affected Stockbrokers

Years ago, the only way to invest and trade stocks is by going through a human stockbroker to process the transaction. Companies and individuals who want to invest in stocks will have to use a licensed stockbroker. Because of this, stockbrokers used to have major control over how money is moved in the markets. However, internet technology has changed all that.

Nowadays, there are many websites and financial apps that allow people to invest in stocks without even talking to a human agent. Many discount brokerage firms online also offer zero commissions making these deals more attractive than going through a traditional stockbroker or brokerage firm.

One example of an app that offers commission-free trades is the Robinhood app. According to their website, Robinhood’s goal is to democratize finance for all by allowing investors to trade stocks, options, and other financial products without charging a fee or commission per trade.

You might be wondering: How does Robinhood make money if they are not charging any commissions? There are other ways brokerage firms earn revenue. Some of the common methods brokerage firms earn revenue include the following:  

  • Income from interest – If you have uninvested cash in your account, the brokerage firm will offer you a small interest on this cash. But they don’t let that cash just sit there. They use the money by investing in financial products that yield high returns.
  • Rebates or compensation from market makers – This is also known as “payment for order flow”, which refers to the amount of money a third-party market maker pays a broker to route the order through them.
  • Add-on services and products – Some companies offering free products sell upgrades and additional services to customers. Robinhood, for instance, has an add-on called Robinhood Gold that they sell for $5 a month.

Many investors, especially beginners, prefer to start with apps like Robinhood because of the commission-free offer. This is not surprising because this could save you a lot of money especially if you are active in buying and selling stocks.

For example, you want to make 10 transactions this month. If you use a discount brokerage firm, that will cost you around $100 dollars if you’re paying $10 per trade. If you use a full-service stockbroker and you’re paying $150 per transaction, that’s $1,500 in fees. If you use an app like Robinhood, that’s $0 in fees, which means more money available for you to invest.

What does this development mean for stockbrokers? Obviously, the demand for human stockbrokers has declined. With more people going through the zero commission and discount brokerage firm routes, it does not make sense for many investment companies to hire more stockbrokers. Some brokerage firms prefer to improve their computing and software capabilities, rather than hiring more employees. Some financial experts are even bold enough to say that being a stockbroker is a dying career.

Can I Still Make a Lot of Money by Being a Stockbroker Today?

You might be wondering whether it is still possible to make a lot of money by being a stockbroker today. The answer is yes, however, the opportunities are not as numerous as they used to be decades ago. This is one of the reasons why many traditional stockbrokers have shifted to becoming financial advisors instead. 

A financial advisor is like a full-service stockbroker but the focus is more on the ability to give advice rather than the capability to trade stocks. If you’re a financial advisor, what you’re selling to the client is your financial expertise, which they will not be able to get from generic trading software.

People and companies who turn to financial advisors usually have a high net worth so there is an opportunity to make a lot of money there. However, even as a financial advisor slash stockbroker, there are still many factors that will influence whether you will be successful in this field. You have to build a good client base and show them that they could trust your financial decisions. To achieve these, you have to have the experience and track record to back you up.

If you are an average American who graduated from an unknown college with a network of friends who earn minimum wage, the possibility of having a rags-to-riches stockbroker story is slim. While you can always count on determination and hard work, you also have to take into account that you could be up against Ivy League grads who have millionaire friends ready to invest. 

In a nutshell, you can still make money as a stockbroker, however, you have to develop other skills to stay relevant. You must be able to offer value and personalized service that computers or tech tools will not be able to deliver. You also have to have top-notch sales and networking skills to acquire and retain ideal clients.