Dealer

A dealer holds an inventory of securities and stands ready to trade with customers. When you sell a bond to a dealer, the dealer buys it with its own money. When you buy, the dealer sells from its own holdings.

Dealers quote two prices: a bid price at which they will buy and a higher ask price at which they will sell. The difference, the spread, is their main source of profit. Because they hold securities, they also face the risk that prices move against them.

Dealers are especially important in markets where trading happens directly between parties rather than on an exchange, such as bonds, currencies and many derivatives. In these markets, large banks often act as dealers, providing liquidity to investors.

The difference from a broker is that a broker acts as an agent, arranging trades on behalf of clients, while a dealer acts as a principal, trading with clients directly. Many firms act in both roles and are called broker-dealers.