A broker-dealer can be an individual or a company that not only acts as a broker for its clients but also trades in the stock market using its own account. Broker-dealers have dual function and act as both principal and agent in the stock market and hence are unique form the traditional brokers. Most of the existing brokerage companies are of this nature. A brokerage firm acts as a broker (agent) when it executes orders on behalf of clients, whereas when it trades for its own account it acts as dealer (principal).
Broker-dealers fulfil several important functions which includes providing investment advice to their customers, enabling easy exchange by involvement in market-making activities, facilitating trading activities, and publishing investment research.
As a broker the broker-dealer tires to understand their customer’s financial needs and investment objectives then provide financial advice or recommendation regarding the type of investment that best suits the client. They also help you build a portfolio taking your needs into consideration. They usually will work on a commission basis and their fees will vary from one broker to another with respect to the level of service they provide and their fee structure. These firms facilitate individual investors to trade in the market and one must open an account with them to trade in the stock market.
As a dealer the broker-dealer trades in its own “house”account .The broker dealer assists in proper functioning of domestic securities market and deal with foreign buyers as well. The brokerage might also buy securities from its client or other firms and hold them to its portfolio for a while. Securities bought from clients can be resold in OTC market or to other firms which is completely up to the brokerage to decide. The brokerages will definitely hold the shares of particular shares for whom they have taken up the responsibility of making them liquid.
A Broker-dealers firm can be of various sizes, they can be small independent firms which usually function as sub-brokers to the brokers and they might be big firms which are subsidiaries of giant commercial and investment banks. Irrelevant of their size they function as a body facilitating individuals to trade in the stock market and also undertake the function of a market maker.