Reviewed by Aug 16, 2023| Updated on
If you follow business or finance news, you must have come across the term dealer quite often. As the word suggests, a dealer is someone who deals something or makes a deal with someone for a particular thing. When trading in the market, dealers have an important role and that is why it is important to understand the term dealer and the importance of the person who is referred to as the dealer. In an effort to do so, let us go through the basic concept behind this term and understand the importance of it in the trading world.
The term dealer is often used for an individual or a company who buys and sells securities either through a broker or otherwise for their own account. Dealers are an important and critical entity in the market. Dealer acts as a principal in trading in his own account and plays a significant role which is much different than a broker who is just considered to be a middleman. The responsibility of creating liquidity in the market and boosting the long-term growth opportunities falls to the dealer.
Another role of a dealer is to make securities markets and offer investment related services to investors. This is why, when it comes to the over the counter market, the dealers are considered to be the makers of the market who offer the opportunity to bid and pose quotes that we can notice against the price of securities. The responsibility of executing orders on behalf of the customers falls to the dealers.
When talking about dealers, it is important to know that they are prominent figures when it comes to the securities market. They have a number of important roles to carry out in the market. The dealers make markets in securities, underwrite securities, and provide investment services to investors. One of the important goals of a dealer is to seek profit from the spread between ask and bid prices. Dealers often ask profit from the difference spread across the ask and bid prices. They play an important and critical role in fuelling the liquidity in the market.
Although dealers play a majority of important roles in the market, it is important to note that they do not undertake any kind of business on behalf of the clients or make any transactions between two or more parties. Another point worth mentioning is that dealers are different from the traders and brokers in many aspects; one of which is that a dealer buys and sells securities for their own account, whereas a broker or a trader does not trade for their own portfolio.
Dealers differ majorly from traders and there is no chance of confusion between these two terms if you understand the core concept behind each of these terms. While a dealer buys or sells securities as a part of a business, making this an integral part of their business activities, the traders merely buy or sell securities and assets from their own accounts and this is not done as a part of any business activities.
There are also entities present in the market who arrange trades between buyers and sellers but do not purchase and hold the securities in their own account. Even though it is easy to confuse such entities with a dealer, it is important to note that such entities cannot be considered as a dealer.
The profitability of dealers have been challenged in recent times by various factors like increased technology requirements in order to keep up with the rapidly changing market trends, industry consolidation and heightened regulatory environment which is also the reason behind the increase in compliance costs.
Another term that you need to be familiar with in accordance with the term dealer is the term dealer market. As the name suggests, a dealer market is a place or an environment where various dealers come together under one roof to buy and sell securities for their own accounts. In the dealer’s market, the dealers can deal with each other and use their own funds to close the transaction. This is much different from a broker’s market where the brokers work as agents of the buyers and sellers. In the dealer market, the dealers provide all the terms of the transactions including the price.
Although the term dealer is often used in the securities market, there are other people who use this term for different purposes. One such use is in the business world where a dealer can be a person or a business company that trades in or executes the purchase or sale of a specific product or service. You can understand this better with the help of an example; for instance someone who deals in sales of furniture can be considered to be a furniture dealer, a person who sells antiques can be considered to be an antique dealer and so on.
Now that we have gone through the basic concepts behind the term dealer, it is important to separate and differentiate it from the term broker as it is something that most people get confused with. As we have already discussed above, dealers and brokers are significantly different from one another, although they are both associated with the buying and selling of the securities.
The reason why there is always a confusion between dealers and brokers is that they almost have the same tasks to perform but with some very different aspects. One of the main differences between a dealer and a broker is in relation to their role in the market as well as the capital required. With respect to that, you can say that a broker is a person who executes trade on behalf of others and acts as middlemen, whereas a dealer can trade in business on their own behalf.
Another important difference between a broker and a dealer is that a dealer can buy and sell securities from their own account, whereas a broker does the same on behalf of their clients. Dealers have the power to make all the significant decisions while dealing. On the other hand, a broker has to follow their client’s instinct and make sales and purchases according to the client’s wish.
Dealers are much more experienced than brokers when it comes to trading in securities. While a broker is paid a commission by the client for their work, a dealer is a primary principal and owns assets of their own.