Dealers are people or companies that buy and sell securities for themselves, either through a broker or directly. Unlike brokers who work on behalf of clients, dealers trade for their benefit.
Dealers play a big role in the market. They create markets for securities, support the sale of securities, and offer investment services to investors. Essentially, dealers are the ones who set the buying and selling prices you see when you check the price of a security in the over-the-counter market. They also help keep the market flowing smoothly and growing over time.
In the United States, dealers have their registration category. In Canada, the term “dealer” is often used as a short form for “investment dealer,” which is similar to a broker-dealer in the U.S.
Understanding Dealers
In the securities market, a dealer is a person or company that is ready to buy or sell securities for its benefit. They buy securities at their bid price and sell them at their ask price. Dealers aim to make money from the difference between these prices, while also helping keep the market fluid by adding liquidity. They don’t work for clients or arrange deals between others.
A dealer and a trader have different roles. A dealer regularly buys and sells securities as part of its business, while a trader buys and sells securities for their account, not as a business.
Lately, dealers have faced challenges in making profits for several reasons. These include the need for advanced technology to match fast-paced markets, consolidation in the industry, and stricter regulations leading to higher compliance costs.
Regulating Dealers
Dealers in the securities market are overseen by the Securities and Exchange Commission (SEC). To comply with regulations, all dealers and brokers must register with the SEC and become members of the Financial Industry Regulatory Authority (FINRA).
People involved in the following activities typically must register as dealers:
- Those who openly offer to buy and sell a particular security regularly (in other words, they make a market in that security).
- Individuals managing a matched book of repurchase agreements.
- People who issue or create securities that they also buy and sell.
Requirements of Dealers
According to SEC rules, dealers have specific responsibilities when they work with customers. These include quickly carrying out orders, telling investors about important details and any conflicts of interest, and asking fair prices based on what’s happening in the market.
Dealers can’t start doing business until they get approval from the SEC. They also need to join a self-regulatory organization (SRO), be part of the Securities Investor Protection Corporation (SIPC), and follow all the rules set by the state.
Dealers vs. Brokers
There are two main roles related to buying and selling securities. Even though they may seem similar, they have differences.
A broker helps connect people who want to buy and sell securities but don’t trade for their own benefit. On the other hand, a dealer trades securities for its portfolio. Many times, dealers also work as brokers, and they’re called broker-dealers. These firms can be small independent ones or parts of big banks. Depending on the market and the transaction, broker-dealers can act as both brokers and dealers.
Another difference is how they charge for their services. Dealers add a markup when they sell securities from their inventory because they’re part of the transaction. Meanwhile, brokers charge clients a commission for handling trades on their behalf.
Dealer Markets
A dealer market is a place where many dealers meet to buy and sell securities for themselves. Here, dealers can trade directly with each other using their own money to complete the deals. This is different from a broker’s market where brokers act as middlemen for buyers and sellers. In a dealer market, brokers aren’t allowed to trade. Dealers set all the terms of the trade, including the price.
Other Dealers in the Market
The word “dealer” is often linked with the stock market, but it’s used in other contexts too. A dealer can be anyone or any business that buys or sells a particular product or service. For instance, someone who sells cars is known as a car dealer, and someone who sells old and valuable items is called an antique dealer.
Dealer FAQs
Once dealers purchase securities like stocks and bonds, they sell them to other investors at a price higher than what they bought them for. The gap between the price they buy at (bid price) and the price they sell at (ask price) is called the dealer’s spread. This spread represents the profit the dealer earns from the transactions.
When you start an account with a broker-dealer, you have to give certain information. Before you start an account with anyone, you should check the broker’s past and if they got in trouble before. The SEC’s website helps you find a broker’s past or if they got in trouble.
Brokers will usually ask for this information from you:
Your name
Social Security number (or taxpayer identification number)
Address
Phone number
Email address
Date of birth
Driver’s license, passport, or other government ID
Job status and what you do for work
If you work for a brokerage firm
How much money you make each year
How much money you own
What do you want to do with your investments and how much risk you can handle
You also have to decide what kind of account you want to open. Brokers usually offer two types: a cash account and a margin account.
Finally, you need to decide what you want to invest in. You can also let someone else decide for you if you permit them to make choices for your account.
More than 3,400 companies deal with securities, says FINRA. Some big names among these companies are Fidelity Investments, Charles Schwab, and Edward Jones.
Broker-dealers can be one person or a whole company (like a partnership, limited liability company, corporation, or other group). According to the latest information from the Financial Industry Regulatory Authority (FINRA), there are over 3,400 broker-dealers available to pick from.
Conclusion
Dealers are individuals or companies that buy and sell securities for themselves, either with the help of a broker or on their own. They are overseen by the Securities and Exchange Commission (SEC). Dealers play a vital role by creating markets for securities, supporting the issuance of securities, and offering investment services to investors.