Broker-Dealers

A broker-dealer is an individual or firm acting as agent or principal in a securities transaction.
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Broker-dealer firms exist in the markets to assist investors with executing trades and making financial decisions. Broker-dealers may serve as principal or agent to execute trades on behalf of customers.

Broker-dealers act as an agent when acting on a client’s behalf with a third-party. Broker-dealers act as principal when, in trading for their own account, they sell customer securities from the broker-dealer’s own inventory.

When placing a trade, an investor uses a brokerage firm to buy or sell a security and typically pays a fee for the service. There are two types of brokerages: full-service and discount. Full-service brokers provide multiple services to clients, including financial advice, retirement planning, strategies, etc. Discount brokers execute the trades the client wants to make.

Dealers make trades for themselves and keep an inventory of securities. Primary dealers work with the Federal Reserve to create liquid markets in securities like Treasury bonds. Many customers of large institutions are broker-dealers who execute trades for clients and their employers.

Brokerage firms provide tools and resources that allow investors to make trades and seek financial advice. As brokerages offer more comprehensive services, many of the broad descriptors traditionally associated with financial service firms are less distinct as they become increasingly interconnected.

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FAQs

How do you become a broker-dealer?

A broker-dealer is an individual or firm acting as agent or principal in a securities transaction. Broker-dealer firms exist in the markets to assist investors with executing trades and making financial decisions.

Broker-dealers may serve as principal or agent to execute trades on behalf of customers. Broker-dealers act as an agent when acting on a client’s behalf with a third-party. Broker-dealers act as principal when, in trading for their own account, they sell customer securities from the broker-dealer’s own inventory.

Becoming a broker-dealer requires multiple certifications and licenses from state and federal agencies, including FIRNA, SIPC, and the SEC.

Who are the largest broker-dealers?

Many broker-dealers manage multiple billions of dollars. As of 2020, the largest firms include Fidelity, Charles Schwab, Wells Fargo, TD Ameritrade, and Edward Jones.

What is the difference between a broker and a broker-dealer?

The primary difference between brokers and dealers is that brokers trade securities for clients, while dealers trade for themselves. Broker-dealers are certified to do both.

There are two types of brokerages: full-service and discount. Full-service brokers provide multiple services to clients, including financial advice, retirement planning, strategies, and more. Discount brokers execute the trades the client wants to make.

Dealers make trades for themselves and keep an inventory of securities. Primary dealers work with the Federal Reserve to create liquid markets in securities like Treasury bonds.

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