Dealer Markets

dealer markets

Markets in which traders specializing in particular assets buy and sell for their own accounts.

When trading activity in a particular type of asset increases, dealer markets arise. Dealers specialize in various assets, purchase these assets for their own accounts, and later sell them for a profit from their inventory. The spreads between dealers' buy (or "bid") prices and sell (or "ask") prices are a source of profit. Dealer markets save traders on search costs because market participants can easily look up the prices at which they can buy from or sell to dealers. A fair amount of market activity is required before dealing in a market is an attractive source of income. The over-the-counter (OTC) market is one example of a dealer market.

1 Investments: Background and Issues

Trading among investors of already-issued securities is said to take place in secondary markets. Therefore, the over-the-counter market is also an example of a secondary market. Trading in secondary markets does not affect the outstanding amount of securities; ownership is simply transferred from one investor to another.

Auction Markets

The most integrated market is an auction market, in which all traders converge at one place to buy or sell an asset. The New York Stock Exchange (NYSE) is an example of an auction market. An advantage of auction markets over dealer markets is that one need not search across dealers to find the best price for a good. If all participants converge, they can arrive at mutually agreeable prices and save the bid-ask spread.

Continuous auction markets (as opposed to periodic auctions, such as in the art world) require very heavy and frequent trading to cover the expense of maintaining the market. For this reason, the NYSE and other exchanges set up listing requirements, which limit the stocks traded on the exchange to those of firms in which sufficient trading interest is likely to exist.

The organized stock exchanges are also secondary markets. They are organized for investors to trade existing securities among themselves.

3. Many assets trade in more than one type of market. What types of markets do the following trade in?

a. Used cars b. Paintings c. Rare coins secondary markets

Already existing securities are bought and sold on the exchanges or in the OTC market.

auction market

A market where all traders meet at one place to buy or sell an asset.


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