Trader Vs. Investment Banker

If you're playing on Wall Street, you may feel like you're learning a foreign language. Terms like "bull" and "bear" are easy enough to understand. Others may be more difficult due to confusing nomenclature: preferred stock is actually a fixed income asset, like a bond, rather than a special sort of equity. "Trader" and "investment banker" are two similar terms that can cause confusion if not carefully defined.

Investment Banker

Investment bankers -- like other business bankers, accountants and attorneys -- work with companies to plan and manage corporate finance. Investment bankers play a very specific role as advisers to companies who offer stock or bonds on a public exchange. Investment bankers help business owners decide how and when to "go public" -- offer stock on an exchange -- and when to raise capital by issuing corporate bonds. They provide expertise when companies merge or purchase other companies. Investment bankers ensure that companies follow all rules and regulations for their stocks and bonds.

Trader

Used loosely, a "trader" is someone who buys and sells securities. Traders may work on the floor of a stock exchange, physically handling the trades of hundreds of companies; they may work at a bank or investment firm; or they may work only for themselves. Traders buy and sell based on orders from outside parties unless they are working for themselves. Due to the many layers within a stock exchange, there may be several traders involved in any single trade. The bottom line is that if you buy and sell securities -- for yourself or for someone else -- as your primary source of income, you are a trader.

Operational vs. Advisory Roles

Within the investment world, trading is classified as an operational role. Traders do the down-and-dirty work of swapping assets for cash and generally do not give advice to others in a professional capacity. Investment bankers are advisory and administrative people. They give advice, assist with the legal issues of stock offers and monitor accounts for regulatory issues. Put simply, traders are detail people while investment bankers focus on the big picture.

The Volker Rule

The roles of trader and investment banker received additional scrutiny in the late 2000s as many large investment banks ran into financial trouble. The Volker Rule, passed as part of a financial regulation bill in 2010, requires that investment banks keep trading done for clients separate and distinct from trading done on behalf of the institutions themselves. This rule is intended to prevent conflicts of interest within banks who give advice to publicly traded companies. While the full impact of this rule is unknown at the time of this writing, there is no doubt that these roles will be more easily defined in the future.

References

• "Wall Street Lingo: Thousands of Investment Terms Explained Simply"; Peterson, Nora; 2007
• "Entrepreneur" magazine; What Exactly is an Investment Banker?; Caspairie, Jim; June 2007
• "Steps for Developing a Career in Investment Banking / Private Wealth Management / Equity Research / Sales & Trading"; University of Michigan Ross School of Business Office of Career Development; Nov. 2010
• "Reuters Breakingviews" blog; Banker-vs-Trader Duel Over on Wall Street; Jul. 2010
• "The New York Times"; Times Topics: Volker Rule; June 2010