Difference between trading and investment banking?

Graduate School Business School - MBA
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<p>Another small advise from me:</p>

<p>Go with your gut. Go with your instincts. Trust me on this your instincts are crucial to forexing. Maybe its just me but whenever I place a bad trade my insticts kick in and they tell me beforehand that this isnt gonna turn pretty. It may be hard for you overanalyzing people on CC who like to analyze that A- you got in Underwater Weaving in 1st grade and how it will affect your chances at Harvard, but trust me. However this is just personal experience. YOu may or may not have that gut reactions.</p>

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<p>but set those stop losses and limits</p>

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<p>how would you guys recommend gettin started in trading for a high school student. And what market is the best to begin with (forex vs stocks)</p>

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<p>Stocks for sure. And I would not recommend "trading" stocks. Rather invest in them. Find a stock you like trade long term (6months-1year). Research your stuff. Look at the balance sheet, cash flow, the ratios (PE, PEG), and learn about the business going on. You need to get used to investing and making trades before you can play with forex. If you want more help in how to invest just post here or PM me. Good luck!</p>

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<p>Is getting a job in a firm/bank for S & T more difficult than getting into investment banking? Do most jobs that people get in S & T in banks pay similar to i banking (i.e. around 100K with bonuses)?</p>

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<p>Frankly its easy for people to say things like "traders run investment banks now" - and while I don't disagree that there has definitely been a power shift over the years at i-banks from traditional banking divisions (M&A) to the trading divisions (equities / FI), there needs to be a little perspective here.</p>

<p>Fact is, the path to become a top trader at any bulge bracket firm is largely unstructured and depends a lot on timing, luck, skill and opportunity - not to mention for every trader there are dozens of bankers (i.e. way fewer spots, and therefore, opportunities). This is not to say that the top prop traders at the big houses don't pull down massive bank - they absolutely do - my point is that this is a very highly specialized and relatively small group of people who are playing at the very top of their game on a global basis.</p>

<p>In sum, if a person wants to get some solid finance experience coming out of undergrad, its hard to beat a traditional i-banking analyst position in terms of flexibility in career path (i.e. post-analyst options - MBA, private equity, VCs, etc.). At the same time, if you are a naturally born trader and you know that's what you want to do for your long term career - by all means go for it, but I'd argue that people coming to this thread who ask questions like "what's the difference between S&T vs. i-banking" haven't really done enough due diligence to know that they want to do any one particular thing straight off the bat and stick with it over the long haul (though there may be a few out there).</p>

47

<p>Ivy grad touches on some interesting points, and being someone whose actually gone through the recruiting process and also done some recruiting, I'd like to add a few:</p>

<ol>
<li><p>There is a trend toward specialization in investment banks these days. You just don't trade equity or fixed income now..you trade a very very specific instrument (esp. at larger firms, where an entire desk is often devoted to a single product). While it is correct to say there will still be more bankers than traders, with the increasing of specialization, I feel there will an increase in opportunities in the trading realm.</p></li>
<li><p>The increase in the number of markets will also bode well for opportunities in trading. India and China are 2 places which could be extremely large markets for Americans to play on. Other emerging markets are in Latin America and Eastern Europe. The US markets are extremely efficeint, and thus more difficult to make money on. Hence, the search for profits will mean there are more markets that are commonly traded on, and this means more traders will be needed to play on those markets. </p></li>
<li><p>Increase in hedge funds, and another area where more traders will be needed: They are here to stay no matter what you hear about the so called "hedge fund bubble" bursting or new SEC regs.....the funds with enough talent will always yield superior returns. Today hedge funds control about the 20% of the volume on the US equity markets (and some days close to 50% on the NYSE)..I only see this, the number of hedge funds, and their assets under management (already close to $1 trillion) going up. It seems like everyone and their grandmother is starting a hedge fund these days, so there will be more job opps....1 good year at a hedge fund can be financially amazing for a trader. In fact, very often, hedge funds, along with VC and private equity firms, beat out investment banks in recruiting the top MBAs and undergrads.</p></li>
<li><p>The influence of traders in i-banks has increased anyway you slice it. There used to be a perception in investment banks that traders were gorillas or dumb jocks, while the m&a guys were the brains of the outfit....this is not the case anymore. </p></li>
</ol>

<p>That being said, I agree with Ivygrad that an i-banking analyst position at least for a couple years is hard to beat for getting a good well rounded grasp of the financial world. Yes, there will still be more openings in i-banking than s&t, but I see trading as an area that will have more growth in the future.</p>

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<p>jwblue,</p>

<p>Would it be recommended to learn Chinese or Hindii in order to trade in those markets?</p>

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<p>
[quote]
Would it be recommended to learn Chinese or Hindii in order to trade in those markets?

[/quote]
Absolutely, and don't forget Klingon.</p>

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<p>I have a question to people who are asking language question:</p>

<p>Tell me how in any rational reason a language will help in trading?!?! Hedge funds nowadays use automated systems. As in you just sit there and it trades for you. LoL. Forex traders often even automize their system. Listen to trade if you can number crunch and just know the market you can make cash. Why would chinese or hindi help? BTW i speak hindi myself lol.</p>

<p>Sorry to sound harsh. But in all my interactions with TOP OF THE TOP rated traders I have never found a reason like this.</p>

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<p>jwblue brings up some valid points which I'd like to comment on...</p>

<p>1) the point about the increasing trend of specialization. totally agree. but this also bolsters my counter point - i.e. trading is a highly specialized skill to begin with - now with increasing specialization even WITHIN the trading divisions - a person entering that field is really putting all of their "eggs" into one highly specialized basket. Now, I'm not saying that a fresh graduate can't pull it off successfully (in fact, a highly motivated individual with enough research and drive most certainly can). However, that said, if it doesn't work out - what then? Trading desks are all about producing. Period. Your P&L is out there for everyone to see on a daily basis - in other words, how much money you've made or lost is plain to see. It's largely a sink or swim environment. If you can stomach that kind of risky environment (better yet if you thrive in that kind of environment), then yes, this is for you. But for a lot of folks out there who want to get comprehensive exposure to the world of finance in the shortest possible time with a certain degree of structure, training, relative "safety", and maximum flexibility post-2 years, then i-banking is still a great choice. </p>

<p>2) I agree that emerging markets are going to play an increasing role going forward (in terms of capital inflows, research coverage, liquidity, etc.) At the same time, these countries have an eye on developing their own capital markets as well. Of course the largest, best run, bluest of the blue chip international companies will be able to access capital in the international markets (i.e. London and New York), but the development of their own capital markets is and will continue to be an extremely important goal. What does that mean? These markets will (in time) be able to raise funds in their own currency on their own markets and will be able to retain liquidity / trading on their own markets (i.e as opposed to listing DRs on overseas exchanges). This means that the bulge brackets will need to have a presence in these local markets to compete - (hire local traders / research teams, etc.) My point? Yes, emerging markets will grow in importance - and there will be increased opportunity. But for everyone - i.e. the level of competition will also grow in step with this increased opportunity. I would argue that in the future, a trader with local knowledge of his/her particular emerging market has a huge advantage over a US trader who is sitting in NY trying to play the market with the differences in time zones, etc. In fact, most of the large banks already actively recruit the best traders of the best local firms to join their desks in emerging markets.</p>

<ol>
<li><p>Hedge funds. Absolutely agree with the point about the increasing importance of hedge funds (that's why all of the major banks are trying to leverage their capital base to get a slice of this action). The smart money is clearly being run by hedgies. That said, if one argues that trying to break into a top trading desk at a bulge bracket was difficult - its that much harder to break into the hedge fund business (and nearly impossible without prior trading experience). The best analogy would be the top M&A bankers trying to graduate to private equity firms or VCs - there just aren't enough spots to accomodate everyone. In fact, most hedge funds are extremely small operations - some as small as 2 or 3 traders. And in order to get the attention and respect of the top hedgies, normally you have to have some kind of prior experience with these guys (e.g. a top hedge fund sales guy selling to hedgies or a structured finance / derivative sales specialist dealing with hedge funds). In short, its a very exclusive club.</p></li>
<li><p>Agree. In fact, my earlier post acknowledges this trend / shift. And any person who has spent time with a top prop trader would never call him "stupid" - he's arguably going to be one of the sharpest people in the bank.</p></li>
</ol>

<p>Bottom line? The purpose of my posts is not to discourage those thinking about pursuing trading careers, the purpose is to try and give a more balanced perspective to those who haven't had any experience in the industry (which I have). Yes there is a ton of money to be made in the S&T area - but these positions come with their own particular risks and costs that people should at least weigh and consider as they eye the brass ring.</p>

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<p>Ivygrad makes very valid points, and I for the most part agree. In fact, if you have any reservations, I say, go into i-banking, than if you so desire, move into trading later on...perhaps at a hedge fund, VC, or PE firm (I did). Also, it is much easier to go from a i-banking position to a trading position than vice versa....rarely will you find a derivitives trader who goes into m&a (and a successful trader would never want to be a banker anyway). </p>

<p>Yes hedge funds tend to be hard to break into, but they are growing in size and number....it shouldn't be impossible for someone who is smart, has done the research, and has solid experience/education. </p>

<p>As far as knowing a language for emerging markets---just know the universal language of profit. Obviously knowing the language will enormously help in getting a job in the local office of a bulge bracket firm (though I see english becoming more popular in the future...its clearly the language of business), but its not necessary for actually trading the market from the US (which bulge bracket firms indeed do)....also, the smaller bank or the hedge fund won't have local offices.</p>

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<p>sorry to bring this up again, </p>

<p>where would you guys suggest a newbie start trading/investing? online such as e-trade? Where did you guys trade when you first started?</p>

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<p>Use someplace like IB which has a per-share based commission system. I wish I used them instead of a fixed rate broker. As for trading/investing don't do it other than with dispensible money. Understand the fact that you need an edge in order to succeed in markets whether it be analysis, execution, knowledge etc. You should also understand that odds are stacked against you as most trader/investors fail to beat the market.</p>

<p>Hope this helps.</p>

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<p>sorry, but what is IB? Do you mean interactive brokers?</p>

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<p>Here's a totally uneducated question:</p>

<p>What would job prospects in S&T look like ten years down the line for people with few (if any) computer programming skills? It would seem to me that traders are becoming increasingly replaceable with the development of more sophisticated trading software.</p>

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<p>What's the difference between stock traders and stockbrokers? Don't they basically do the same thing?</p>

<p>What's the difference between a broker and a trader in the first place? (other than the fact that "broker" has the word "broke" in it-brokers are not to be trusted-just kidding) :)</p>

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<p>IB= Interactive Brokers.</p>

<p>Jpps> Some programming is almost mandatory to know nowadays. Most traders nowadays use pretty sophisticated technology and knowing how to code enables them to create helpful tools in a more efficient manner. Yet another good reason for me to learn how to code well. </p>

<p>IhateCA> A broker is the guy who are salespeople who take clients orders. Traders are the guys executing them. There are two types of traders flow and prop. Flow traders are the guys who seek to execute client orders in the best possible manner by providing liquidity as well as managing the risk exposure of the bank. Prop traders are the ones who use firm capital to actually bet on rising and falling prices. In many banks some prop activity occurs due to order execution as well because the bank may temporarily take the other side of a trade to create a market.</p>

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<p>FWIW, I've worked on or near trading floors in four different companies and I can assure you that, in these firms, traders do not code. They trade. They may specify things to be coded to quants or analysts who support them, but they do not sit there coding themselves. Coding can be very time-consuming and they don't have time for that. Most traders don't know how to code, either. It is not in their job description, and they don't need to be able to do it at all.</p>

<p>They do, however, know how to specify things to be coded. And they know how to interpret the information that results from the coding, and use it as they deem appropriate in their trading activity.</p>

<p>There are some particularly "quant" subareas that may be exceptions to this to an extent. But even in these areas, mostly I've seen the traders spec out coding tasks to quants or support analysts. Because, though these particular traders could in fact do it themselves, they don't have time to do this and trade at the same time.</p>

<p>One person can only do so much.</p>

<p>They might make routine spreadsheets themselves to help with certain tasks. But once these get too time consuming or complex they are delegated.</p>

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<p>Much has changed nowadays. Nearly every trader codes. Most of the flow trading is pure equities and FI are conducted by automated algorithms anyways so traders do need to know how to code. Although a quant is typically there you still need to make adjustments which someone who doesn't know how to code can't do. And if exotic derivatives are being traded, programming is necessary for modelling and pricing.
Simply by looking at the statistics published by the exchanges regarding program trading is enough to show the importance of programming. The majority of the liquidity existing in the markets nowadays are because of these different market making algorithms. <a href="http://www.nyse.com/Frameset.html?displayPage=/marketinfo/ProgramTrading.html%5B/url%5D"&gt;http://www.nyse.com/Frameset.html?displayPage=/marketinfo/ProgramTrading.html&lt;/a&gt;&lt;/p>

<p>As you can see 68.9% of all trades on the NYSE is conducted by programs which also excludes different directional strategies which may not trade as frequently or trade as a basket.</p>

<p>Yet another reason for why I am studying C.</p>