TD Ameritrade Holding Corp. (AMTD), Charles Schwab Corp (SCHW): What’s Up With This Duo?

The retail investor is back in the stock markets, buying stocks, dumping bonds, and generally becoming more active. This is usually a sign of a market top, as “mom and pop” traders tend to be late to the rally and early to a bust.

Some companies make more money on rising asset prices and activity. Let’s take a look at two different asset managers and brokerage firms:

TD Ameritrade Holding Corp. (NYSE:AMTD)

TD Ameritrade Holding Corp. (NYSE:AMTD) delivers stellar operating margins of 36% on income derived from transaction fees and net interest margin on customer accounts. In the most recent quarter, commission revenue fell by 2%, with TD Ameritrade logging an average of 378,096 trades per day.

The company is growing solidly in its asset management and asset-based business. This segment grew 4% year-over-year with net interest margin coming in at 1.52% on its assets. The company is a perpetual float generator, taking in investor capital and investing it in positive carry assets that help it generate an income on its customers’ cash. Much of the spread is earned on the company’s margin offerings, whereby it uses free cash which can be loaned to investors trading on margin.

TD Ameritrade Holding Corp. (NYSE:AMTD) has unmatched exposure to an increase in trading activity and rising interest rates. Some 40% of revenue comes from the commissions, with the remaining coming from net interest margins.

One challenge remains: the firm needs to attract new clients inexpensively and keep trading activity high on fee-generating trades. The company’s foray into exchange-traded funds could put a damper on commissions. The company offers a very extensive collection of commission-free ETFs which its customers can buy and sell for free. Free customers can still be profitable, though, as unused assets can be levered for margin loans.

At 18 times forward earnings expectations, TD Ameritrade Holding Corp. (NYSE:AMTD) is worth a second look. Rising trading commissions and higher rates will lead this company to disproportionately large bottom-line growth.

Charles Schwab Corp (NYSE:SCHW)

Charles Schwab Corp (NYSE:SCHW)’s core business is in asset management, fee-generating accounts, and net interest margin, which make up nearly 80% of the company’s revenue. The company has lost some ground in trading, as its higher fees are less competitive in the world of online discount brokerage. Trading makes up less than 20% of its total revenue.