If you are an investor, it is important to understand what the role of a dealer means for financial markets. Read ahead to find out the dealer definition and get to know which functions they perform!
Who Is A Dealer?
A dealer, whether an individual or a firm, serves as an intermediary between buyers and sellers by offering bid and ask prices for a particular security. Dealers conduct transactions with any willing investor who agrees to these terms.
What You Need To Know About Dealers
A dealer usually establishes bid prices below the market price and ask prices above it to acquire assets at a lower rate and sell them at a higher one, thus earning the spread between the two prices. However, in return, dealers also assume counterparty risk in the process.
Every market has its own unique dealer type, with each of them undergoing varying levels of regulation. For instance, in the stock market, dealers are subject to strict supervision, while in other cases, such as with the crypto market, the guidelines are less developed.
Depending on the market, a dealer may either interact directly with private investors or exclusively through intermediaries like brokers. However, nowadays, many dealers also function as brokers and are known as broker-dealers.
In times of heightened financial activity, whether in a period of growth or decline, dealers often become the focus of public attention and receive high praise or, on the contrary, heavy criticism in the media for inflating asset values or taking advantage of market downturns.
Note that in recent years, dealers have faced various challenges that have impacted their profitability. These factors include industry consolidation, the need for increased tech prerequisites as a means to keep pace with rapidly changing markets, and a more stringent regulatory environment that leads to higher compliance costs.
