Dealer

What Is a Dealer?

In financial markets, a dealer is a participant that trades securities as a principal, meaning it uses its own inventory and capital rather than acting only as an intermediary for a client's order. Dealers stand ready to buy from sellers and sell to buyers, which helps keep markets liquid. Many dealers are registered broker-dealer firms, a term used in U.S. securities law for firms that trade securities for others or for their own account.

How Dealers Make Money

A dealer posts two prices for a security: a bid price at which it will buy and a higher ask price at which it will sell. The gap between them is the bid-ask spread. If a dealer buys at the bid and sells at the ask, it earns the spread. In practice, dealers also face risk, because the inventory they hold can fall in value before it is sold. They therefore hedge positions and adjust their quotes based on how much risk they are carrying.

Dealers Versus Brokers

A broker acts as an agent, executing an order for a client and charging a commission. A dealer acts as a principal and becomes the counterparty to the trade. The same firm often does both, and rules may require it to disclose which role it is playing in a given transaction. Dealers are common in over-the-counter markets, where there is no central exchange and trades are negotiated directly, and in bond and currency markets.

Why It Matters to Investors

Dealers provide liquidity, meaning investors can usually find someone willing to trade even when no other buyer or seller is immediately available. The spread a dealer charges is a real cost of trading, so investors may notice wider spreads in thinly traded securities. Dealers also may have conflicts of interest, since they profit from the prices at which they trade with clients. Understanding whether a firm is acting as a dealer or a broker helps investors interpret the prices and fees they see.