Learn the ins and outs of financial sales and trading
Sales and Trading (S&T) is a group at an investment bank that consists of salespeople who call institutional investors with ideas and opportunities, and traders who execute orders and advise clients on entering and exiting financial positions. Sales and trading is the lifeblood that makes or breaks an investment securities firm, be it a stock brokerage, a hedge fund, or an investment bank. If the firm can’t successfully sell its services to clients, then it is unable to do business – and if it can’t trade well, then it becomes difficult for the firm to obtain and keep clients and to make money.
Watch this short video to quickly understand the main concepts covered in this guide, including what sales and trading is, the different types of activities, and career paths in sales and trading.
Investment sales are one of the primary activities in sales and trading. The salespeople at an investment firm communicate information about securities to investors. In an investment bank, the potential clients are usually large institutional investors, while in a stock brokerage or hedge fund the investors may be primarily individual retail investors. Along with the investment firm’s trading staff, sales personnel monitor investment news such as quarterly earnings reports or merger/acquisition information to alert them to specific investment opportunities that they can pitch to potential investors.
Sales staff serve an especially important function in initial public offerings (IPOs) that an investment bank underwrites. When an investment bank takes on the job of handling the initial issue of a new stock, they commit to selling a specified number of shares at a specified minimum price. To avoid the need to buy part of the stock offering itself, the investment bank must be certain that its salespeople can successfully sell the required number of shares in the secondary market, either to institutional or individual investors. Being able to efficiently sell securities is a large part of what makes an investment bank profitable. To that end, the sales staff is continually developing relationships with potential securities buyers, such as pension funds, mutual fund portfolio managers, and other large institutional buyers.
In addition to contacting clients, the salespeople in an investment firm are also continually in contact with portfolio managers and other trading staff to get timely market information and to know which investments the trading staff is focused on.
In a traditional stock brokerage firm that engages in sales and trading, the brokers are the salespeople who contact potential investors – either retail or institutional – and try to convince them to invest money with the firm. Brokers may or may not also act as traders. The more common practice, however, is for brokers to handle bringing in investment capital which the trading staff is then in charge of managing.
In other areas of financial sales and trading, investment firms that offer mutual funds or exchange-traded funds (ETF) do not underwrite IPOs but must nonetheless employ an effective sales staff. Sales employees in firms such as Fidelity Investments are charged with attracting investors to the various funds that Fidelity, Vanguard, or other similar firms offer. Mutual funds and ETFs make money by charging a fee that is a percentage of the total amount of money invested in the fund. Therefore, the more investors and the greater amount of investment capital that the firm can secure maximize the firm’s profit.
Sales of hedge fund investments can vary significantly in terms of who does the selling and who the potential investors are. With a new hedge fund started by a new hedge fund manager, the hedge fund manager who does the trading may well also be the fund’s sole salesperson, at least in the beginning, until they attract enough investors and generate sufficient profits to hire a salesperson and delegate the sales work to them. Hedge funds also differ in whom they approach as potential investors. Some hedge funds target institutional investors, but others concentrate their efforts on attracting investment capital from high net worth individuals (HNWI) who have large amounts of money to invest.
Ultimately, sales work is intimately connected with trading work. This is because the bottom line job of sales personnel, regardless of what type of financial firm they’re employed by, is to convince potential investors that the firm’s traders are better than traders working for competing financial firms. A stockbroker tries to convince investors that the brokerage firm offers superior research and analysis in sales and trading. A hedge fund manager aims to persuade investors that he or she can generate higher returns on investment. Salespeople at an investment bank pitch the bank’s ability to obtain the maximum amount of capital for an IPO, or the bank’s ability to deliver the most efficient buying and selling services for large, institutional investors.
As part of sales and trading activities, traders buy and sell securities, either on behalf of the investment firm they work for or on behalf of their clients. Investment firms employ a number of traders who specialize in different investment areas such as stocks, bonds, or commodities. Specialization in sales and trading typically goes much deeper than that with individual traders assigned to, for example, just to trade the gold market or to trade a specific market sector such as health care or transportation.
Traders are responsible for managing both risk and capital and for security analysis. In most large trading firms such as investment banks, because of the large volume of securities they typically trade at one time, traders often engage in sales and trading with their counterparts in other investment firms or commercial banks.
The two basic, different types of trading are agency trading and proprietary trading, more commonly referred to as prop trading.
Agency traders act as a trading agent (hence the name) for clients. Their job is to execute trades as skillfully as possible on behalf of the firm’s clients. Skillful trade execution is especially important for traders at investment banks that are making trades for institutional investor clients. There’s no trick to buying 50 or 100 shares of a given stock, but when a trader needs to buy 100,000 or a million shares, they have to strategically spread out their buying in order to be able to acquire the desired number of shares at a favorable price without having their buying drive the price up.
In contrast to agency traders, prop traders do not trade on behalf of investment clients but instead are in charge of trading the financial firm’s own money. For example, a prop trader at a commercial bank might be engaged in trading the foreign exchange (forex) market so as to maximize the value of the bank’s capital.
Prop traders have the freedom to trade that agency traders do not; however, they are still restricted by risk limits set by the investment firm.
There is a third type of trader, a flow trader, that is sort of a hybrid between an agency trader and a prop trader. Flow traders can be simultaneously trading on behalf of clients and on behalf of the investment firm when, for example, a client wants to buy shares of a stock that the investment firm holds and wants to sell. The flow trader makes the buy on behalf of the client, but by selling the client shares the investment firm owns, is also acting as an agent for the firm.
While it’s important to understand the basic types of trading, it’s also important to keep in mind that concepts such as agency trading and prop trading are just general categories and that trading is often not as clearly black and white as those distinctions. For example, portfolio managers of hedge funds and mutual funds are investing on behalf of clients, which makes them agency traders, but are also typically free to make pretty much whatever investments they want to, so in that sense they are prop traders.
Traders are typically differentiated not just by how they trade – agency or prop trading – but by what they trade. At an investment or commercial bank, traders are divided into different groups that handle trading different types of securities, such as fixed-income securities, equities, commodities, or foreign exchange.
The advent of financial derivatives such as collateralized debt obligations (CDOs) and contracts for difference (CFDs) have both expanded the categories of trading and somewhat blurred the lines between categories. CDOs, for example, fall into the overall classification of fixed-income securities, but because they are derivatives, they may be traded separately by traders specifically assigned to trade derivatives or may be traded by a firm’s regular fixed-income trading group.
Within each basic trading group (e.g., fixed income, equities, commodities), traders specialize in trading specific instruments. For example, a firm’s fixed-income trading group will have traders assigned to trade government bonds, corporate bonds, and other debt-related instruments. Traders may be further specialized by trading instruments within given maturity ranges, such as only trading bonds with maturities of 10 years or less.
While fixed-income traders focus their attention on the macroeconomic actions of central banks and fluctuating interest rates, equity trading involves researching and analyzing individual companies. The sales and trading staff in most investment firms are supported by research teams whose job it is to collect and collate information. The information gathered is then presented to the trading staff who makes the final trading decisions based on that information.
Equity trading requires the consideration of more factors than are usually involved in fixed-income trading. Companies are analyzed from a variety of angles. A company’s financial health may be analyzed according to different financial metrics, such as its price-to-earnings (P/E) ratio, debt ratio, or discounted cash flow (DCF) analysis. It may be further analyzed in terms of its position in the market, the strength of its management team, and the strength of the market sector it is in.
An equity trading group will also usually have traders assigned to just trade stock indexes such as the S&P 500 index.
Agency traders who strictly act on behalf of clients, buying and selling at the clients’ behest, usually trade a wide range of equities because they are not directly responsible for the trading decisions. In contrast, prop traders of equities are assigned to trade specific market sectors, and may even be further specialized within sectors. Some traders assigned to trade technology stocks may be specifically in charge of trading financial technology (fintech) stocks.
Prop traders of commodities, currencies, options, and other financial derivatives are also typically specialized. Commodity traders are usually assigned to trade groups of commodity futures such as precious metals, energy futures, or agricultural futures. Within each basic category, traders may also specialize in trading just one specific market, such as cotton futures or wheat futures.
Currency traders almost always focus on trading one specific currency, although that will include trading the currency against a variety of other currencies. A trader assigned to trade the British pound (GBP) will trade various GBP currency pairs, such as GBP/USD, GBP/EUR, and GBP/AUD.
The most widely traded financial derivative, options, covers a wide range of trading and may fall under the category of different trading groups depending on the nature of the options. There are options available on fixed-income securities, equities, commodities, and currencies, so where an options trader fits into an investment firm’s trading groups depends on which kind of options they are trading.
There is a new type of trading that is dominated by traders working in concert with computer programmers – algorithmic trading. Algorithmic trading involves developing computer programs designed to automatically initiate trades based on technical analysis factors such as trading volume or price action. There are even algorithmic trading programs that are based on the analysis of fundamental factors such as news events. Algorithmic traders specialize in identifying which variables can best be used to create a computerized trading program.
Speed in trading execution is the main advantage offered by algorithmic trading. Once such a computerized trading program is developed, it can analyze information and execute trades more quickly than an individual trader can.
Both sales and trading careers in financial firms offer tremendous income potential. But precisely because of that fact, the competition for jobs is intense and requires both superior talent and extra effort to succeed. Starting out in either career category typically involves working long hours that go well beyond just the regular market trading hours. Since potential investors are often busy with their own careers during the day, meeting with them may frequently require a lot of after-hours work.
Success as a salesperson for a financial firm requires all the basic qualities that make successful salespeople in any arena – self-confidence, an outgoing and engaging personality, initiative, a self-starter attitude, high motivation, goal-driven action, and persistence. You just need all of that times ten, because it takes a bit more skill to engage in sales and trading and sell someone a multi-million dollar investment than it does to, say, sell them a shirt.
Like any salesperson, investment salespeople must know their product. This requires them to have much of the same knowledge that the trading staff has. A potential investor might ask a salesperson to give them an analysis of a specific investment, and while the salesperson isn’t a researcher, analyst, or trader, they had better have a good answer ready. Therefore, people interested in pursuing a career in sales need to have not just an interest in and talent for selling, but also a keen interest in, and understanding of, the investment instruments that they will be marketing to potential clients.
Some sales careers, such as that of a stockbroker or hedge fund manager, involve doing sales work, research, and trading work. One factor to consider in relation to investment sales is what type of investors you’re more comfortable in approaching – individual retail investors or institutional investors.
The primary talents required for a career in trading are the ability to analyze investment opportunities and to skillfully execute trades. Skillful trade execution is the most uncommon talent. Many traders are good at identifying investment opportunities but are not so good at managing a trading position. The best traders have the ability to execute and manage trades so as to minimize risk and maximize profits. They are able to successfully balance their way between the error points of staying in a trade too long or exiting a trade too early.
Successful traders have specific personality traits that help to make them successful. First, they can handle the active world of trading without experiencing undue stress. They are able to make quick trading decisions without being hampered by either overconfidence or debilitating fear of loss. They enjoy the action of the financial markets. They have an appetite for doing the necessary research to uncover investment opportunities. They’re not averse to working long hours – the work of analyzing investment opportunities often extends well beyond market trading hours.
Traders at investment banks and other investment firms advance by proving their skills. As they show their ability to successfully make profits and avoid losses, they are gradually given more money to manage and greater latitude in terms of how much risk they can take in trading positions.
Because there are so many different types of trading, if you’re considering a trading career, then you should also carefully consider exactly what type of trader you want to be. Are you more interested in being an agency trader in charge of executing trades for clients or in being a prop trader who is in charge of making trading decisions? What’s more attractive to you: working as part of a trading team in an investment bank and specializing in trading certain markets, or being a hedge fund or mutual fund portfolio manager who is largely independent and invests in a wide range of securities?
Regardless of whether you pursue a career in sales or trading, you may at some point want to make a significant career change. Successful financial salespeople can usually easily transition to sales in other areas. However, for traders, there is generally a bit less career mobility. Trading is a more specialized occupation, one limited to the world of finance and investing. If you work for an investment bank, a background in trading will typically afford you opportunities to pursue other careers in the banking world. On the other hand, if you’re a prop trader at a small firm or a hedge fund, you may be able to take your skills to a similar firm, but there are likely not as many “in-house” opportunities to move to a new career position.