The stock market is a complex financial entity made up of many different businesses and participants. Brokers, dealers and broker-dealers make up a large portion of stock market activity. Brokers and dealers engage the public and are often an intermediary between investors and the stock market. These businesses open the doors for nearly anyone to own stocks.
The stock market is a large public auction that sells equity shares in corporations. When a company goes public, they issue shares that represent percentage ownership in the corporation. These shares trade on a public exchange for anyone to buy. The exchange may be a live trading floor, such as the New York Stock Exchange (NYSE), or an electronic market, such as the Nasdaq, but the auction mechanism is at the heart of all stock transactions. The prices of shares are affected by supply and demand ratios.
While anyone can purchase stocks, few are actually able to walk into a stock exchange and buy shares directly. Likewise, an investor cannot approach a company directly to purchase equity. Other businesses must interact with the stock exchange on behalf of the public. Brokers and dealers are the primary businesses that accomplish this. They have direct access to the stock market, and they use this access to profit from the service of letting the public participate.
A broker's primary service is to buy and sell stocks on an exchange for members of the investing public who wish to own part of a company. When anyone decides to participate in the stock market, a broker is usually the first place they go. An account is set up for the client through which she trades stocks. The broker accepts stock orders from the client and then executes these directly on the exchange. A business that engages solely in broker services interacts with the stock market for its clients only. Every transaction made affects a client's account. For this reason, a broker is often referred to as an "agent."
A stock market dealer trades equities under its own name. The business itself maintains stock holdings that are not in the name of any client. The dealer may actually be a client of another broker, so as to trade these stocks for its own account. However, unlike a "trader," which maintains her own account with a broker that affects no one else, a "dealer" may use its portfolio to offer services to the public. "Market makers" are dealer businesses that continuously buy or sell certain securities from the public, using their own holdings for these transactions. Thus they are in the business of dealing securities independent of an exchange.
Many companies engage in both broker and dealer operations, making them broker-dealers. The securities these companies transact for the public may come directly from an exchange or from the company's own holdings. This depends on the business model of the company and type of transaction executed. Most of the well-known brokers are broker-dealers. This offers flexibility that often benefits clients. Such a company can sell its own holdings to the client which can increase execution time since the order is not actually placed at the exchange.
- Securities and Exchange Commission: Guide to Broker-Dealer Registration
- Broker-dealer - Wikipedia
- NYSE. "The NYSE Market Model." Accessed Sept. 18, 2020.
- U.S. Securities and Exchange Commission. "Nasdaq Market Center Systems Description," Page 3. Accessed Sept. 18, 2020.
- Library of Congress. "Wall Street and the Stock Exchanges: Historical Resources." Accessed Sept. 18, 2020.
- Statista. "Largest Stock Exchange Operators Worldwide as of March 2020, by Market Capitalization of Listed Companies." Accessed Sept. 18, 2020.
James Highland started writing professionally in 1998. He has written for the New York Institute of Finance and Chron.com. He has an extensive background in financial investing and has taught computer programming courses for two New York companies. He has a Bachelor of Arts in film production from Indiana University.