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January 30, 2024
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Calculate profit and loss with ease!
Parties Buyer Seller Dealer Broker Market Maker involved in the market
Buying stocks, bonds, ETFs, or whatever asset there is can seem quite simple, especially in nowadays era of the internet, apps, and fin-tech. Do you know that many more things are going on behind the scenes?
This article will explain the parties involved in the process of buying and selling in the market.
Do note that these parties are not exclusive to one class only, one dude can wear many caps — depending on how deep his pockets can be.
How many parties are there?
The market lives on a few groups of people that move them. These people are Buyers, Sellers, Dealers, Brokers, and Market Makers.
Buyers
Buyers refer to the people who… well, buy. They can be institutions or they can be individuals, as long as they are buying the asset, they are called a buyer. Can a person be both a buyer and a seller at the same time? Yeah, why not.
For example, you have Stock A and you want Stock B. So, you sell Stock A (which makes you a seller) and you buy Stock B which makes you the buyer.
How do buyers look to make money? Buyers would usually purchase an asset either in the hope to sell it at a higher price later, or some also look to make a profit from direct payment from owning an asset, such as stock dividends, bond interests, and real estate rental payments.
Sellers
No market can ever exist without the tango between buyers and sellers. Sellers sell assets such as stocks, ETFs, commodities, and more.
Sellers can also be anyone. They can be individuals, institutions, the bee that Amber Heard’s dog stepped on, or whoever it is that came across your mind (as long as they are allowed to legally do so).
Sellers would usually make money by selling assets at a higher price than the price that they once bought. Some also sell borrowed assets at a high price, hoping that the price will fall later when they have to reimburse the asset they borrowed (this is called short selling).
Broker
Brokers are often mistaken for your usual traders, perhaps from their dapper suits, cigar scent, or that firm handshake everyone asks you to do in your job interviews.
Here’s a fun way to try and identify which is which — you’d usually find traders/investors going about in sweatpants looking like they haven’t seen a shower in ages, while brokers looking like they bask in gold showers.
Brokers do trade, but their main goal is not to create a good portfolio, but rather to facilitate the transactions between buyers and sellers in the market.
You could say that they’re like the Tinder app of the market. You can go by yourself and try to look for a good match out there, but with a broker like Tinder, the whole transaction gets easier and swifter.
Market maker
Market makers are quite interesting, where their main activity is to actively buy and sell high volumes of assets at the bid and ask price, regardless of what type of asset it is, how the asset is performing, etc. Market makers are usually institutions, but they can also be individuals (with that much money to do so).
Why are they like that? That’s because their main concern is not about buying low and selling high, their concern is to make money from spreads — so if they buy a stock at $1, for example, they’ll then sell it a $1.02. Now that $0.02 per stock is their profit.
Market makers are considered an essential part of the market because it provides the market with liquidity. Imagine a market without these bunch who are ever willing to buy and sell these assets upon request. It will be much harder for you to find a willing buyer or a willing seller.
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So, how they work is much like a middleman, where they would buy a lot of the stocks that are going around, and they’ll sell it to interested buyers.
Apart from liquidity, market makers also keep the asset price less volatile, since they facilitate most of the buys and sells, they pretty much influence the price. The price can still go up or down, but it would be much more regulated (in a sense) with these market makers around.
Fun fact, market makers are usually brokerage institutions that provide trading services to investors.
Dealers
Some of you might think, wow the stock picture used is quite similar to the one before this, even the watch is the same!
Well, it was a result of our careful thought to symbolize how similar dealers are to market makers — and how it would take some time to get a different-styled stock photo.
Dealers are those who sell and buy assets at ask and bid prices, and they make money from the spreads. Very much like market makers.
The only difference between the two is that dealers usually operate in an Over-The-Counter market (OTC) while market makers usually operate in exchanges like NYSE and so on.
Bottom Line
In summary, buying and selling stocks involves a whole cast of characters, including buyers, sellers, brokers, market makers, and dealers. They all play a crucial role in making the market run smoothly, or at least as smoothly as possible. It’s like a well-orchestrated dance, with each participant playing their part and trying not to step on anyone’s toes.
Buyers and sellers are the main players, as they are the ones who actually buy and sell the assets. Brokers act as the matchmaker, helping buyers and sellers find each other and facilitating the transaction. Market makers are the veins of the market, always ready to keep the market flowing. Dealers are like the cousins of market makers, operating in a slightly different market but still making money from the spread.
Together, they create a market that is (hopefully) efficient, liquid, and not too volatile. And even though they may seem like a bunch of rich, fancy people in suits, they’re really just regular folks trying to make a few bucks from the market.
So the next time you buy or sell a stock, take a moment to appreciate all the people who made it possible. And maybe even give a little nod of thanks to the market makers, who are always ready to buy or sell and keep things moving. Without them, the market would be a much lonelier place.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.
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