When you are not immersed in the worlds of finance all the time, it is sometimes difficult to know the difference between a trader and a broker. While both are involved in buying and selling securities, we will highlight the differences while focusing on their respective incomes.
What is a Broker?
A broker is an agency trader, or a professional practising the brokerage activity. It acts as an intermediary between various operators (buyers, sellers and traders) and the financial market. It is a third party designed to facilitate transactions between buyers and sellers. As an intermediary, the broker gets a commission in the form of a margin or fees for carrying out buy or sell orders. He can also act as a fund manager in charge of a hedge funds agent for some of the clients.
Also, beware of terminology nuances such as a dealing desk and non-dealing desk broker.
The dealing desk broker or market maker literally makes the market by fixing its prices and making profits. This is thanks to a fixed margin between the selling and buying price, and becoming the opposite side of every deal, buyer or seller. These are large banking or financial companies.
The non-dealing desk broker acts as a neutral intermediary and realizes its profits thanks to commissions or variable margins by placing orders to a dealing desk.
What is a Trader?
A trader is a market operator who buys and sells assets in order to generate financial margins and therefore profits through his operations. The trader has two main functions, to manage risk and to speculate.
The main difference between a trader and an investor is the length of time the assets are held. The trader is seeking the best short-term returns and the investor seeks a long-term return.
The duration of asset holding also makes it possible to distinguish three types of traders, the “scalper,” who holds assets for a few minutes at most, the “day-trader” who holds them for one day, and finally the “swing trader” who holds them for more than one day.
A trader can work for a company and in this case, can operate with the funds of their employer. They are compensated with a salary and bonuses according to their results. In this case, it operates from a trading room, investment bank or asset management company.
The Property Traders – The Highest Paid
Among salaried traders, the “proprietary traders” are the elite. They have carte blanche to speculate with their bank’s capital on all possible markets, with no other risk limit than what they impose on themselves. Prop traders are selected from the most experienced and talented traders and are the ones who receive the highest pay. If you happen to work in a prop trading firm, you can expect to begin at between $100K and $200K USD. Bonuses are as high as 50-100% of base salaries.
With the rise of the internet, more and more independent traders operate on their own account in the markets through online brokers. Speculating at any time of the day or night, they profit from the drop in brokerage commissions linked to the fierce competition between online brokers.
The main difference between a broker and a trader is that a broker acts as an intermediary and profits thanks to the commissions paid. In contrast, a trader is an active operator. He or she makes profits based on their ability to anticipate the market’s state and assess the risks of trading operations.
Broker vs Trader: Who Makes More Money?
Regarding the differences between broker and trader, we come to a very important point: who makes more? Brokers make a profit off trading commissions, and they are prone to lower risks in comparison to traders. After all, brokers sometimes work with a trader’s company money used by the brokers to make trading orders. Also, the brokers usually have dozens or even hundreds of clients, which also shield them from risks. In general, numbers are difficult to track. But most brokers in the US begin their career in the five figures range. The most successful ones can reach a mid 6 figures salary range.
According to statistics, beginner day traders on Wall Street can gain approx $80 000 per year. The most seasoned traders’ salaries go up to $300,000 per year. However, keep in mind that Wall Street traders are not the benchmark when it comes to trading success. In other parts of the world, traders tend to earn half as much as their peers from Wall Street.
Also, the salary differs depending on whether it’s a professional or individual trader working from home. It is almost impossible to give an exact salary range of an independent trader. The latter can earn according to its trading experience, the country and the conditions of a specific stock market.
There are also traders of all levels. It is very likely that a young independent trader will earn a lower salary than an experienced trader. Likewise, an independent trader whose main activity is trading will generate more earnings than a trader who only devotes a few hours a day to it.
How to Become a Trader
If you are wondering how to become a trader, there are some basic steps and rules to follow:
- Dedicate enough time to familiarize yourself with your trading platform so that you can make the most of it
- Train yourself in technical analysis and tools that will help you better read and understand charts
- Test multiple trading strategies and tools on a demo account to find what works for you
- Concentrate on just a few markets and assets that you need to understand and master
- Place stop-loss orders to close losing positions automatically and avoid big losses
- Trade small positions at first, then expand them with experience.
The gains in trading depend on the amount of initial capital invested. However, to start, it is advisable never to invest sums that you cannot afford to lose.
Moreover, contrary to popular belief, it’s possible to start on the stock market with a small capital, for as little as 200 euros. This allows you to trade without risking losing too much money. And then, the more confident you feel, the more you can increase the stake.
To trade with a larger stake without raising more capital, you can use leverage. The latter can multiply the gains in case of winning positions but also the losses in an opposing scenario.