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What Are the Pros and Cons of a Dealer Market?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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Dealer markets are trading markets in which investors have the ability to execute their own trades within those marketplaces. Markets of this type also allow investors to authorize a dealer or broker to make trades on their behalf, with the transactions going through the investor account rather than through the account of a brokerage house. There are several benefits associated with the dealer market, including the speed with which trades can be conducted. At the same time, there are also a few drawbacks that can make this type of trading platform unsuitable for certain types of investors.

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One of the chief benefits of a dealer market is the quick and easy access to trading activity. Since the investor or someone authorized by the investor to use his or her account does not have to go through a brokerage, it is possible to execute trades without any type of delay. While the actual savings in time may in some cases amount to no more than seconds, even that small amount of time can make the difference between losing or making money. For example, trading in a dealer market means the chance to dump securities that are beginning to drop sooner rather than later, making it possible to sell off the assets before the unit price drops below the original purchase price. At the same time, the investor can quickly initiate a purchase of a stock that is about to experience an upswing in value, before the market price begins to increase, resulting in generating more return from the transaction.

Another advantage of a dealer market is the ability to keep the costs of trading somewhat lower. Since there is no need for an intermediary to manage the orders, the investor can save money on broker and other related fees. This in turn means that there is no need to deduct these expenses from the returns generated, effectively allowing the investor to retain more of the profits.

While there are good reasons to participate in a dealer market such as the NASDAQ, there are also some potential drawbacks. Novice investors who are still learning the marketplace would do well to work through a broker and make use of the expertise and experience of those investment professionals. Attempting to manage transactions without some understanding of how to read markets and project future movements can lead to severe losses. In addition, trading in a dealer market requires committing to being actively engaged in the market throughout the day. For people who cannot devote significant blocks of time to managing their assets, choosing to trade in other markets and utilize the resources of a brokerage to do so is likely to result in greater returns while also avoiding losses that could take place while the investor is engaged in other activities.

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