Dealers are major economic figures in the markets. They make markets in financial securities, underwrite various securities, and give financial investment advice to investors. So dealers are basically the market makers that give the ask and bid prices you see whenever you shop for a particular security in the over the counter market. They get their commissions from those who sell securities to them. If you are buying a security then you are probably dealing with a dealer.
There are several different types of dealers. Some are direct sellers of securities and/or brokers. A broker is a person that buys and sells securities and is usually an outside dealer. The most common type of dealer to deal with in the securities market today are direct sellers, which include brokers such as Bear Sterns and Schwab, J.P. Morgan Chase and Merrill Lynch, as well as Capital Bank and Trust, Fleet Bank, Sun Trust Bank, and many others.
Brokers have the benefit of being able to access funds, whereas dealers need to buy and sell securities for their own accounts. In order to do that, they must purchase the assets you want to trade, or they must place bids on them. So if a broker wants to buy a put option, for instance, he must find an asset that is valued at less than the price he is willing to pay to buy it, in order to exercise his right to purchase an option. Then he has to either buy the option at its strike price, or find another seller willing to sell the same option to him at a higher price.
Stock dealers make money in two ways. First, they get the shares of shares bought and sold in the securities market valued at the asking price. Second, they get the premium which is paid by the buyer at the end of the day. That’s a two-for-one deal for them. Buyers pay the broker, and the broker makes money from the premium paid by the purchaser.
The reason that banks and other large investors are able to buy up large portions of the underlying market is because the government or other institutions to provide them with loans to accomplish that. They use the money they make to buy the shares of the companies, so that there is always a big supply. On the other hand, most small investors are unable to compete with that. Therefore, they usually have to be content with buying individual stocks.
Large retail traders have the advantage of leverage, which means that they can buy a lot of shares without paying as much as the market makers would. Because the dealers cannot exceed the maximum limit on the number of shares they can buy, then this gives them the opportunity to take advantage of sharp price fluctuations. However, market makers have the upper hand when it comes to pricing, because they know how much each share is worth. Also, since they are buying and selling securities in large amounts, they have the benefit of locking in profits over a period of time. All in all, both brokers and dealers have similar goals, which are to provide liquidity in the marketplace and ensure that their clients are protected from risk.