Keywords: broker, dealer, exchange, asset, bid and ask, OTC
3 Ways to Trade
To buy and sell assets, there are three main ways people use to trade:
(1) Brokers
(2) Dealers
(3) Exchanges
1. Broker
Definition
A broker is a middleman between an investor and a securities exchange. To be more specific, a broker is an individual who handles transactions between a buyer and a seller for a commission.
A broker’s job is to find a counterpart for his/her clients to sell or buy a security. A classic Wall Street stereotype of brokers is that a crowd of people on the trading floor holding pieces of paper, yelling at each other, trying to sell or buy securities for their client.
What do brokers trade?
Brokers trade a series of different assets, including stocks, bonds, forex, insurance and real estate.
Why do people need brokers to trade?
To buy and sell stocks, people usually need brokers to place their orders on securities exchanges since securities exchanges only accept orders from their members.
Do I always need a broker in order to sell and buy stocks?
No, you do not always need to hire an individual as a broker in order to trade stocks, but you do need a brokerage to trade stocks unless you want to purchase stocks through Direct Stock Purchase Plan (DSPP).
A brokerage is generically known as stockbrokers and it can be either an individual broker or an online brokerage platform. Since securities exchanges require a membership in order to trade, you cannot purchase the stocks directly from the securities exchanges, but instead, you need a brokerage acts as an intermediary between you and the securities exchanges.
What is the easiest way to trade stocks?
The easiest way to trade stocks is through an online brokerage platform. It takes roughly 20 minutes to set up an account and to start trading stocks.
What is DSPP?
DSPP is the acronym for the Direct Stock Purchase Plan. It is a program where a company sells stocks directly to individual investors without the intermediation of a broker.
Do I need a license to be a broker?
Yes, brokers are specifically licensed to trades with securities exchanges. In order to place an order at securities exchanges as a broker, you will need a license issued by Financial Industry Regulatory Authority (FINRA).
2. Dealers
Definition
Distinguished from brokers, who trade for others, dealers are individuals or firms that trade securities for their own account. The dealers are market makers, meaning that they set bid and ask prices for the security.
What is bid and ask?
Bid Price: The bid price is the highest price that a buyer is willing to pay for a share of stock.
Ask Price: The ask price is the lowest price that a seller is willing to take for a share of stock.
Spread: The difference between bid price and ask price is called the spread.
How do dealers make money?
Dealers make profits by purchasing a stock at a lower price and selling it to others at a higher price. The difference between the bid price (buying price) and the ask price (selling price) of a security is the profit which the dealer makes from the transaction.
What do dealers trade?
Dealers commonly trade bonds, forex, derivatives, and currencies but rarely trade stocks. Dealers can trade stocks through brokers.
Are dealers regulated?
Yes, dealers are regulated by the state requirements and Securities and Exchange Commission (SEC) and not allowed to start trading without registration. In addition, all dealers must be a member of the Financial Industry Regulatory Authority (FINRA), the Securities Investor Protection Corporation (SIPC), and a self-regulatory organization (SRO).
3. Exchanges
Definition:
Exchanges, also called trading exchanges, are markets where securities, foreign currencies, derivatives and other financial instruments are bought and sold. In trading exchanges, people trade based on order books that match buyers and sellers. One of the most famous trading exchanges is New York Stock Exchange (NYSE).
What is an order book?
An order book is the list of orders that trading exchanges use to record the interest of buyers and sellers in a particular financial instrument.
What is OTC?
For a security to be traded on a certain stock exchange, it must be listed on the stock exchange. However, there is no obligation for a stock to be listed and traded on an exchange.
Over-the-counter (OTC), also known as off-exchange, refers to trades that are directly done between two parties, without the supervision of a trading exchange.
Any questions? Want to know more? Leave a comment below!
For related articles please visit the Business/Finance home page.
