Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.
The New York Stock Exchange serves as a marketplace for dealers and brokers to buy and sell stocks. In this lesson we will examine the distinction between dealers and brokers.
Buying and Selling Stock
Joe is interested in buying some shares of stock after seeing news headlines about the New York Stock Exchange. But how do individual people like Joe buy and sell shares of stock? Stock market transactions happen with the help of professional intermediaries who trade, or buy and sell shares, on behalf of their clients. Buying and selling stock requires a license, so a regular guy like Joe has to use these professionals, called dealers and brokers, to participate in the market. Take a look at who these people are, and explore the differences between their roles.
Joe cannot make purchases on the exchange or go to a company to buy stock by himself, but one way for Joe to purchase stock is to contact a dealer, a business that builds an inventory by purchasing shares from individuals when they wish to sell their stock. Then when a customer like Joe wants to buy a stock, the dealer sells it to that customer from its existing holdings. In the event of a sale, the dealer holds onto the stock until someone else wants to buy it.
The dealer functions independently from the stock exchanges. Sometimes these businesses are called market makers, because they create a new venue for stock trades outside of the established exchanges. A dealer that buys and sells stock makes a profit on stock purchases by marking up the share price to investors and marking down the price for sales.
However, it's more likely that Joe will make his purchases and sales with the services of a broker , a business that acts on behalf of a specific client order. When Joe wants to buy a stock, the broker executes the order by finding someone willing to sell that stock on one of the exchanges. This happens through an exchange such as the New York Stock Exchange. The broker charges a commission fee for making the trade.
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One major difference between a dealer and a broker is that a broker transaction only involves the client's order. The broker places an order for the exact number of shares the client wants to buy or sell. A dealer orders for itself first, and then may resell some of those shares to other investors outside of the market. Another difference is that brokers operate within the stock exchange system, while dealers operate outside the exchanges.
Odds are good that any company Joe goes to will actually be a broker-dealer, which is a business that simply combines the two approaches. Most stock trading firms operate this way. Broker-dealers also offer more benefits to the customer than sticking with one system. For example, if the business already owns shares as part of its dealer activities, it can execute trades faster than going to the exchange. Likewise, having access to the exchange allows for unlimited access to the greater variety of market offerings. When Joe places a trade, the shares might even be bought or sold through a combination of both methods.
Because individuals cannot buy or sell stocks without a license, they must use the system of dealers and brokers to participate in the stock market. A dealer is a business that maintains an inventory of stock shares it can then buy and sell outside of the stock exchanges. A broker places trades for clients by putting the order up on the stock exchange. Most of the major investment companies in the U.S. are broker-dealers and use a combination of the approaches to efficiently place trades for their clients.
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