A broker-dealer is a person or firm that is in the business of buying and selling securities.

Firm Roles
Securities firms can assume one of two roles when executing customer transactions on the exchanges or in the over-the-counter (OTC) market:
 

  • Agent/Broker: The first role is as agent, or broker, for the client. The firm will buy or sell a security on the client's behalf and charge a commission for the service. In other words, the firm acts as a matchmaker, essentially never owning the security but, instead, finding a suitable buyer or seller on the OTC market or executing the transaction for the customer on one of the exchanges.
     
  • Principal/Dealer: In the second role, the firm acts as principal, or dealer, and buys or sells the security for itself, assuming actual ownership and, therefore, taking on more risk. The firm might sell the security to a customer from its own inventory or it may buy a security for its proprietary account. The firm's profit comes from the commissions earned in the agent's role. However, when transacting business in the role of principal, it profits from the markup when it sells a security to a customer or from the markdown when it buys a security from the customer.

 

Exam Tips and Tricks
You should know the difference between a principal and an agent and how a broker-dealer can act in either capacity.



New Issue Market

Related Articles
  1. Personal Finance

    Working For An Independent Broker-Dealer Vs. A Big Bank

    Here is an overview of what broker-dealers and big banks have to offer to employees and the different opportunities available.
  2. Investing

    What Does a Dealer Do?

    Dealers possess certain qualities that distinguish them from brokers and traders.
  3. Financial Advisor

    Should You Add A Securities License To Your Qualifications?

    Clients love planners who sell securities, but a securities license takes a lot of work. Learn if the stress and study are worth it.
  4. Financial Advisor

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Financial Advisor

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  6. Financial Advisor

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  7. Financial Advisor

    The Top 25 Broker-Dealer Firms in 2015

    The country's largest broker-dealer firms by annual revenue are clearly doing lots of things right, but they're also facing a massively shifting market.
  8. Investing

    The Top 25 Broker-Dealer Firms for 2016 (LPLA, AMP)

    Find out which independent broker-dealers generate the most revenue and why one major group may face major change in 2016-2017.
  9. Investing

    Decline Of The Independent Broker-Dealer

    Since the financial crisis of 2008-2009 the numbers of independent broker-dealers have been steadily declining. Find out why, and if the trend will continue.
  10. Financial Advisor

    Series 63 Exam Prep: The Broker-Dealer

    Before you take the series 63, you need to understand jurisdiction and how it affects broker-dealers.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center