What is the difference between a principal and an agent? Can an Investment dealer act as a principal, an agent, or both?
1. A principal buys the issue from the issuer and then tries to sell the bonds to the investing public. As such, the principal takes on the risk of ownership. The primary source of income for a principal is the spread between their purchase price and sale price of the securities in question.
2. An agent acts as a go-between for the issuer and the investing public. The agent does not take on ownership of the issue in question. The primary source of income for an agent is charging a commission for services rendered.
3. Investment dealers act as principals and as agents. In theory, anyone can act as a principal when securities are purchased and then sold, since being a principal means purchasing the securities and taking on the risk of ownership. Only dealers are licensed to act as principals when bringing new shares to the market, and only dealers are licensed to act as agents.
Published August 10, 2006 . Filed under: Lesson 3.1