Despite the global financial crisis of 2008, it’s no secret that a career in trading remains a highly lucrative prospect. For those who possess the socioeconomic acumen, the analytical aptitude and the sheer determination to succeed, financial trading can be an extremely rewarding career choice.
But how do you know what kind of trader you’re going to be? And how do you know where to find the best earning potential? After all, there are many different types of trading, and each one contains its own intricacies and complexities.
To give you some answers to these questions, we’ve compiled a list of the top trading careers, along with a brief overview of the various roles that a trader fulfils.
This is what you need to know.
Types of Trading
Firstly, before you focus on a particular market, you need to understand what your role is going to be within the bigger machine. While this is typically defined by the company that you work for, lines can often be blurred and definitions can be ambiguous – although, on the whole, traders generally operate under one of three specific guises:
1. Sell Side
If – as many traders do – you work for an investment bank, then it’s likely that you’re going to be operating on behalf of that bank’s clients as opposed to seeking out direct profits for yourself (as used to be the case with banks). While you could be executing trades in any of the primary markets, most sell-side traders specialise in one particular area (and, in most cases, stay in this area).
As you progress in your career, you will receive a great degree of autonomy and responsibility, using your expertise to identify and make the right trades.
2. Buy Side
If you work for an asset management firm, then you’ll likely be on the buy side of the spectrum. At the majority of companies, this means working under a portfolio manager who issues the basic instructions; it is then up to the trader to finetune the details and implement those instructions.
As a result, this means that your primary role would be to find the best time, price or product to execute the trade, but always within the set parameters of the portfolio manager. This diversion of responsibility is reflected in the lower levels of salary and bonuses that buy-side traders receive, while there is also a sense within the industry that this line of work doesn’t possess the thrill or excitement of other types of trading.
3. Hedge Fund
Hedge fund traders utilise the capital of their employer to execute trades, usually under a portfolio manager at first but with a much greater freedom once they have proven themselves. Unlike sell-side traders, they work to make a profit for themselves – not for clients – with top traders able to make (or lose) nine-figure sums of money in a single day.
With such astronomical amounts at stake, it’s no surprise that landing a role as a hedge fund trader is incredibly competitive, while hedge funds are also notoriously ruthless when it comes to firing underperforming or stagnant traders. Unsurprisingly, hedge fund trading is one of the most stressful jobs in the world, although there is still no shortage of wannabe traders looking to earn their fortune.
Types of Markets
While the three roles above explain your wider place in the market, they don’t identify the markets themselves. And while some traders – especially at smaller institutions – may take a jack-of-all-trades stance, many specialise not in just one market but in certain aspects of that market.
Here are five of the most popular:
1. Equities Trading
Equities trading is probably the most well-known market and consists primarily of trading the stocks and shares of publicly listed companies. Most countries have their own stock exchange (although some, such as the UK’s FTSE 100 or the US’s NYSE, are far bigger than others), and traders buy and sell during their respective market’s opening hours. As a result, those who deal in stocks and shares are often referred to as day traders.
However, due to the way that equity markets work, stock trading is often a long-term bet. While this can still mean profitability, most traders want to make large short-term gains. As a result of this shift in attitude, the market has decreased in popularity in recent years, although it still remains one of the least risky markets.
To become a stock trader, you’ll need a very strong understanding of the equities market; some traders choose to focus on specific industries.
2. Fixed Income Trading
Fixed income trading involves dealing in bonds, securities and fixed-income assets, which in themselves can involve complex financial packages. Typically, these involve government-issued bonds and securities, although there are also private options, too.
A good example of fixed income trading is the now-notorious Collateralized Debt Obligation (CDO) package, which involves the buying and selling of collections of mortgage loans. (Ultimately, the recipients of these loans could not pay them back, leading to the global financial crisis of 2008.)
CDOs also demonstrate how risky fixed-income trading can be. If you want to get involved in this market, then you need to have a strong understanding of some very complex financial transactions.
3. Forex Trading
Forex trading – the buying and selling of paired currencies – is an increasingly popular market, not just for full-time traders and investors but for part-time enthusiasts, too.
To become a forex trader, you will need to have a strong understanding not just of analytics but of macroeconomics and the socio-political climate of certain countries, too. For example, controversial investor George Soros made $1 billion by ‘shorting’ the British pound in 1992, while Bill Lipschutz famously turned his $12,000 inheritance into $250,000 in his spare time at college.
4. Commodities Trading
Commodities traders deal in physical natural assets such as metals (gold, silver, copper, etc), natural food produce (wheat, corn, etc) and crude oil, with many working for asset management firms in a sell-side position. A good example is John Arnold, whose private equity firm made around $1 billion betting against gas shortages following Hurricane Katrina in 2005.
There are many political, economic and social factors that can affect commodity trading, so traders need to constantly keep on top of developments and foresee where opportunities may arise.
5. Derivatives
As if it wasn’t already, this is where trading can get really difficult to comprehend.
Generally recognised as a complex and risky market, derivatives involve the trading of options and futures, which essentially are, as the name suggests, options to buy or sell a particular asset within a specific time. Most derivatives traders are highly experienced, and they understand how to use these options for leverage, while the low amounts of base capital required are also attractive.
Derivatives are not recommended for beginners, but in the right pair of hands, there are countless examples of smart traders turning a small amount of money into something very big.
While there is undoubtedly a lot of money to be made in financial trading, it is also a very high-risk and stressful profession. Lured by the astronomical sums of money changing hands, many graduates choose to overlook this, but you should always bear in mind that for every million you make, you can just as easily lose.
That said, if you have a very keen eye for mathematical models and statistics, a full understanding of how your chosen role and market work and, ideally, a good mentor who can teach you how to be consistently profitable, then you could make a seriously life-changing amount of money.
Are you a trader? Which type of trading would you recommend? Let us know in the comments below!