Dealers

Definition

Dealers are financial intermediaries who buy and sell securities on their own account, often facilitating liquidity and market efficiency. They profit from the spread between the buying and selling prices of the securities they trade.

5 Must Know Facts For Your Next Test

1. Dealers hold an inventory of securities and assume risk by trading these on their own account.
2. Unlike brokers, dealers do not act as intermediaries but as principals in transactions.
3. The bid-ask spread is a primary source of profit for dealers.
4. Dealers contribute to market liquidity by being ready to buy or sell securities at any time.
5. Regulatory bodies such as the SEC oversee dealer activities to ensure fair trading practices.

Review Questions

• What is the main difference between a dealer and a broker?
• How do dealers primarily make a profit?
• Why are dealers important for market liquidity?

Related terms

Broker: A financial intermediary who arranges transactions between buyers and sellers for a commission.

Bid-Ask Spread: The difference between the price at which a dealer buys (bid) and sells (ask) a security.

Market Maker: A type of dealer that commits to continuously quoting buy and sell prices for certain securities to provide liquidity.