We believe they make a large part of their money trading on margin. As of June 2017, some of my clients have over $1 million in trading accounts with these brokers. In the next section, we’ll get into some of the specifics about this.
As the following chart shows, I believe 95% or more of all brokers make money trading on margin. This is for three reasons:
The brokers provide a wide range of products (stocks, bonds, options, futures, etc)
The brokers make very few profit decisions (they are only concerned with making money for their investors)
The brokers have a great relationship with their investors (they have a reputation for being very profitable).
Some traders also believe they would make a higher percentage trading on margin than they would from the actual trades.
Let’s start by talking about the products themselves.
Settlements and Orders vs. Profit
This is not an area I’ll cover in detail. That will have to wait for the next installment. The biggest issue with margin trading is the huge volume of trades that are executed. If the brokers are charging you 5% of your total order volume, then you’re basically paying 5% of all sales. This is a significant percentage of profits.
But as my example of a small $2,000 order shows, even a small transaction can take a significant amount of cash to execute.
A broker offers a different view (more profit) on the margins (percentage) a client might make. It is also possible to do some margin research at a site like Hedgefunds.com and see the percentage one could expect on each trade. To me, it is a better way of understanding the margin business than watching it happen.
As for profit, when the broker makes money, it’s by collecting commissions from the trader. For instance, a broker might receive a commission of 1% of a trade. Or, at the end of a year, it might collect 1.5% of a trade. For these reasons, they have a higher profit margin than those that do not have commissions.
This doesn’t mean that margin brokers make money on every trade; they can make less than 10$ on a given trade. But they can make up to 12-29$ while some traders need upwards of $10,000.
Margin trading can be very volatile (which can reduce profits) but there are brokers that have the ability to “adjust