Sunday, April 26, 2009

broker and dealers (2)

It is a simple matter to open an account with a brokerage firm:simply appear at (or call) the local office. An account with executive will be assigned to you and will take care of the formalities . Transactions will be posted to your account as they would to a bank account. You may deposit money, purchase securities using money from the account, add the proceeds from security sales to the account, borrow money, and so on. after the initial forms have been signed, everything can be done by mail and\or telephone. Brokers exist (and charge fees) to make securities transactions as simple as possible.
A broker acts as an agent for investors, but dealer (or market-maker) buys and sells securities for his or her own account, taking at least temporary positions and maintaining at least small and transitory inventories of securities. Like a used-car dealer, a security dealer runs risks and ties up capital in order to make it easy for individuals to buy or sell on a moment is notice.Dealers are usually compensated by the spread between the bid price at which they buy a security and the ask price at which they sell it. The percentage spread is typically larger, the smaller the amount of trading activity and the greater the volatility in security is price.
To facilitate the coming together of traders (be they investors, brokers or DEALERS), physical locations and\or communications facilities are required. security exchange are physical locations where trading is done on a person-to-person basis (usually by brokers and\or dealers)under specified rules. Communications networks, formal or informal, are often termed markets. some have clearly defined boundaries; others do not.
Often a firm or even an individual will play more than one role in this process. Most retail brokerage firms hold some inventories of securities and may thus act as dealers (but the law requires that they inform their customers if they do so ). some exchanges have specialists, who serve as brokers for some traders and as dealers for others. Brokers may employ other brokers, dealers may deal with other dealers, and so on.

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