Chapter 2 (part 3)

Question 1

What are the 2 roles Investment dealers play?

Answer 1

1. Principal - Security firm buys and sells securities on its own behalf.
2. Agent - Buys and sells securities on behalf of investor. Makes profit from commission on trades.

Question 2

What is “underwriting”?

Answer 2

The purchase from government or company of newly issued securities. The investment dealer acts as a Principal, Buying the newly issued security with their own capital and in turn selling it for a profit.

Question 3

What are 2 ways investment dealers act as Principals?

Answer 3

1. Underwriting

2. Buying securities on the secondary market

Question 4

What are 5 benefits of an investment dealer acting as a Principal?

Answer 4

1. Its knowledge of secondary markets balances issuing securities on the primary markets.
2. Faster transactions, Adds liquidity to the market.
3. Gives ability to act as market makers also aiding market liquidity.
4. To be more competitive when dealing with large institutional clients.
5. Able to make a profit on trades on their own behalf.