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Do dealers make money from the spread?

Dealers profit from the difference between the buy (bid) and sell (ask) price of a security. A dealer buys securities at the bid price then sells them at the higher ask price. The difference between these two prices, called the spread, is the dealer's profit.

money.usnews.com - Dealer Definition - U.S. News – Money

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What Is a Dealer?

A dealer is a person or financial firm that trades securities in the financial markets for their own account on a business basis. This is different from an individual trader who trades for a personal account, and from a broker, who trades for other people's accounts. Dealers play integral roles in the financial markets by improving liquidity , or the ability of traders to easily buy and sell their securities. Dealers do this by acting as both buyers and sellers of securities.

How Do Dealers Work?

Dealers work by acting on both sides of a trade, meaning they are both buyers and sellers of the securities in their accounts. This is known as making a market in a security. Dealers are market makers in a variety of securities, including stocks, bonds, commodities and currencies. A dealer's objective is to buy at a lower price than it sells so that it can pocket the difference as its profit. By being ready to either buy or sell a security at the quoted prices, dealers help ensure there is an active and liquid market for the securities they trade. Individual investors typically interact with dealers through brokers who buy and sell securities for others' accounts, although some dealers may work with private investors directly. Most dealers are both brokers and dealers, known as broker-dealers. Broker-dealers trade for their own accounts and create markets in securities as dealers while also trading for their clients' accounts.

What Are Market Makers?

A market maker is an individual or firm that acts on both sides of a trade. Market makers are ready to buy or sell a security for their own accounts at the quoted prices. They will buy at the bid price and sell at the asking price, improving market liquidity and efficiency. To act as either a buyer or seller at a moment's notice, market makers must keep large holdings in the securities they trade. This exposes the market maker to a high level of risk because the security they hold could lose value before the market maker can sell it.

Dealers are market makers in the securities they trade.

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How Market Makers Affect Stock Quotes

Stock quotes are presented as bid and ask prices. The bid is the price at which the dealer will buy, and the ask is the price at which the dealer is willing to sell. For example, a dealer may offer a quote of $10.00 to $10.02. This means they will buy at $10 per share and sell for $10.02 per share. The 2 cent difference is known as the spread and represents the profit the dealer hopes to make on the trade. A smaller spread indicates a more efficient and liquid market.

How Are Dealers Regulated?

The Securities and Exchange Commission , or SEC, regulates dealers – most of whom must register with the SEC and be members of a self-regulatory organization such as the Financial Industry Regulatory Authority, or FINRA, to do business. Each state also has its own requirements that must be met for a dealer to do business within the state. You can get background information, including disciplinary history, on broker-dealers through FINRA's BrokerCheck website.

Why You Need to Know About Dealers

Dealers play an important role in the financial markets. One of the central risks for any investor is not being able to sell a security they own. Dealers help mitigate this risk by being ready to both buy and sell a security, thus ensuring other traders can easily move into or out of their positions. Understanding how dealers make markets in securities can help individual investors determine the liquidity of a given market. A small spread on a dealer's quote indicates a more liquid market, meaning it'll be easier to buy or sell a position without affecting the price.

money.usnews.com - Dealer Definition - U.S. News – Money

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