What is a Stock Dealer?

Working as a dealer is like flipping houses instead of being a real estate agent…

Realtors help clients to buy and sell houses. Flippers, on the other hand, buy houses for themselves and then sell them for a higher price. Flippers can make the housing market more liquid by making themselves available to buy when someone is looking to sell, and having houses available to sell when someone is looking to buy. Dealers are like flippers, except they’re flipping stocks instead of flipping houses. They help ensure there’s always a buyer or seller standing at the ready.

A stock dealer is a financial professional who buys and sells securities for their account. The term stock dealer doesn’t describe just anyone buying and selling securities — It only applies to those who do so as a part of their business. If they aren’t buying and selling as a part of a business, they are traders.

Unlike other professionals, such as stock brokers who buy and sell assets to put directly into their clients’ accounts, dealers buy and sell assets to put into their own accounts. Then, they make money by turning around and selling those securities to someone else for a higher price.

Dealers are market makers, which means they make themselves available to buy securities when there is someone looking to sell and to sell securities when there’s someone looking to buy. When brokers need to buy a particular stock on behalf of a client, they often turn to dealers to do so. Many firms act as broker-dealers, meaning they buy and sell securities both for their clients’ accounts as well as their own.

Suppose one of your favorite brands recently went public for the first time. You speculate that the company’s stock price is going to continue to rise, so you decide to buy some shares. (Remember: You can never predict the movements of the stock market or individual securities; all investments carry risk.) You reach out to your brokerage firm and ask them to make it happen. Your brokerage firm might buy those shares from a dealer. That dealer bought the shares last time someone was selling them so that when someone was ready to buy, the shares would be ready.

Investors often work with brokerage firms or financial advisors to purchase shares of a particular stock. But, as with anything else, you can only buy something that someone else is willing to sell. What if you want to buy shares in a particular company, but no one is selling their shares? That’s where stock dealers come in.

Stock dealers act as market makers, meaning they literally make a market for a particular security. They stand prepared to buy stocks at the market price. That way, when someone else is ready to buy that stock, they’re already there, ready to sell. They ensure that investors can get their hands on whatever stock they want at a moment’s notice.

Dealers increase the liquidity of the securities market by standing ready to buy and sell securities. Otherwise, imagine how long it might take for buyers and sellers to connect with one another. Have you ever tried to sell one of your belongings on Craigslist or some other marketplace platform? It’s not instantaneous. Instead, you have to wait for a buyer to be ready. Even then, they might not be willing to pay market value for the item and you may have to haggle a bit. The whole process can take days or weeks — maybe even longer. Dealers prevent that same lag from happening in the securities market.

The term dealer market refers to the transactions that dealers make where they buy and sell shares to and from their own accounts. A dealer participates in the dealer market when they make themselves available to buy stocks (usually in quantities of 100 shares or more) at the market price at a moment’s notice. They’re also ready to sell the stock to another investor when someone is ready to buy. Dealer markets increase the liquidity of the securities market, as it makes it easier for sellers to get rid of their shares at the time they want to.

Anytime you participate in the securities market, you’re taking on some level of risk of losing your money (or failing to make any money). Most people try to buy when prices are low, and sell when they’ve made a profit. But it’s a different situation for dealers, who put themselves in the situation of buying and selling on other people’s schedules.

Suppose the country were experiencing a bear market, meaning a period of economic decline. Economists expect it’s going to turn around soon, and you decide this is a good time to start investing for the first time. You buy some shares in your favorite company. Over the next few years, the country goes through a period of huge economic growth and the price of the shares you bought skyrockets. You want to make sure to lock in your earnings, so you sell when the price is high, resulting in huge profit for you. That’s exactly how many people try to make money in the stock market.

Dealers, on the other hand, buy and sell at the current market price whenever there’s a seller or buyer in need. But what happens to dealers when people are selling when prices are high and buying when prices are low? Dealers have to make money just like everyone else.

Dealers make money by creating a spread, which is the difference between the purchase price and the sale price. So, in our example of you buying shares in your favorite company, let’s say that when you finally decided to sell, you sold your shares to a dealer for $50 each. Tomorrow, the dealer turns around and sells them to someone else with a spread, meaning they add a little extra onto the asking price to make sure they’re able to make a profit.

Unlike long-term investors, dealers don’t make money by the size of the profit margin they get on each individual share. Instead, they make money by creating a small profit margin for each share and selling lots of them. If they sell millions of shares at a particular period of time, then making a few cents per share is still a lot of money.

Like other financial professionals, stock dealers are regulated by the Securities and Exchange Commission (SEC). Section 15 of the Securities Exchange Act of 1934 requires that all dealers register with the SEC.

There are specific anti-fraud conduct requirements that dealers have to meet to ensure they aren’t mistreating or manipulating their clients and customers. First, dealers have to abide by the duty of fair dealing. The statute simply requires that they treat customers fairly — Case law has made more specific rulings on what does and does not constitute fair dealings.

Dealers also have to meet certain suitability requirements. This rule means that if they engage in recommending certain financial products to clients, they can only recommend those that are suitable for a client based on their financial situation, needs, and investment portfolio.

If a dealer fails to meet the requirements set forth by the SEC, they might be subject to both civil and criminal penalties. Depending on the situation, the penalty might be as small as repaying the money that they obtained from clients through fraudulent activity. More severe penalties might include criminal fines or prison time.

Finally, dealers have to receive a license from the Financial Industry Regulatory Authority (FINRA) based on the type of securities they plan to sell. Most dealers receive a Series 7 license, which allows them to be a General Securities Representative and to sell a wide variety of securities products such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

There are many terms to describe different individuals who participate in the investment world. A dealer is a financial professional who trades stock shares to turn around and sell for a profit. Similar to a dealer, a broker is also an individual or firm that buys and sells securities. In the case of a broker, however, they’re buying securities to go into someone else’s account rather than their own.

The difference between a dealer and a broker is like the difference between a personal stylist and a clothing retailer. When you hire a personal stylist, they might help you define your style and help you find clothes that match it. But they don’t actually have the clothes to sell. A clothing retailer, on the other hand, is where the personal stylist would turn to find you the perfect outfit.

Most firms that fall into this category are actually broker-dealers, meaning they can buy and sell securities both on behalf of their own accounts to sell to others and to go into clients’ accounts.

Suppose you contact your broker and tell them you want to buy a particular security. They might purchase it for you from a national exchange such as the New York Stock Exchange or a market like the Nasdaq. But if they already have that particular stock in their possession, they might just sell you the shares from their inventory. This process is known as internalization and allows firms to make money when they sell shares for more than the price at which they bought them.

The individuals that buy and sell securities for broker-dealer firms have to hold a special license to do so. Depending on what type of assets they’re working with, they’ll have to hold either a Series 6 or Series 7 license from the Financial Industry Regulatory Authority (FINRA).

Next, a financial advisor is a professional who provides financial and investment advice to clients. Just like a broker does, a financial advisor can help to purchase investments on your behalf and manage your investment portfolio, but their role can also be far more substantial than that.

The term financial advisor is a broad umbrella that includes many different financial services. They meet with clients to discuss their overall financial picture, help them manage their finances through life transitions, and plan for the future. Financial advisors can also perform more advanced services such as investment management and tax preparation.

Many different professionals can fall under the umbrella of financial advisors. Brokers, certified financial planners (CFPs), and investment advisors are just a few examples of professionals who might call themselves financial advisors. Because the term is so broad, someone could call themselves a financial advisor and offer financial advice without any special education or certification.

A trader is an individual who buys and sells securities for their own account. But unlike a dealer, a trader buys and sells securities not as a business, but for the purpose of growing their personal wealth. A trader is not a financial professional but an individual investor.