Last updated on February 23rd, 2023 at 07:48 am
If you are interested in trading or are thinking about starting trading, then you must know about what trading is, what are different types of trading are, and which is more suitable to you and your lifestyle.
In this article, I’m here to help you understand what is agency trading and what is principle trading. Besides their meaning, definition, and how they work, This article will also differentiate between the two i.e. Agency Trading vs Principal Trading.
Before moving on to the types of trading, you must have clarity on what exactly trading is. This is so that you have a base knowledge about trading and what you are about to enter into.
Trading
Trading is the exchange of securities in the market. It is similar to the concept of buying and selling where we buy devices in exchange for money. In the same way, in trading, we exchange securities.
Securities are also known as shares. You can visit What is securities in finance? In easy words. to learn more about securities and their types in detail.
You as a person can trade in 2 ways, agency trading or principal trading.
- Principal Trading
- Agency Trading
Principal Trading
This type of trading involves 2 parties in main, The client and the firm. Here the firm buys securities from the market and holds them to their firm. The reason they hold is to make profits by capital appreciation.
The intent of holding the securities to the firm is to sell them to make profits. However, these securities are to be sold to the client at the current market price.
In principal trading, when the investors trade through a brokerage firm, the orders are accomplished by using the inventory or the firm. This helps the firm to gain more profits.
As these are principal traders, their main aim is to increase the capital for the firm, so they focus more on the firm rather than clients.
Also Read : Financial rights to the Assets of a Business
Agency Trading
Agency trading is a lot different than principal trading. In simple terms, you gave your securities to someone else to take care of them for you expecting a return in exchange for a commission to the broker.
Agency trading is more complex than principle trading. The firm is more focused on the client in such firms. The reason the firms focus on clients is that they are promised a fixed commission in exchange for the client’s capital gain.
What agency traders do is they take your request of buying or selling, they find a client who can satisfactorily complete this transaction and profit both sides. This is done in such a way that buyer and seller both get maximum compensation. And as the middleman, Agency traders receive a commission from both sides for a successful transaction.
Agency Trading vs Principal Trading: Difference
Risk & Return
Agency Trading
In this case, the Risk & Return is borne by the client. The brokers are enablers for the clients as they help the clients to complete their transactions in the most efficient way possible.
Principal Trading
In Principal trading, the firm is the one who bears the risk and enjoys the benefits of higher returns. They are the ones studying the market and investing according to their research for the firm’s benefit.
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Primary objective
Agency Trading
The main objective of Agency trading is to gain as many clients as possible and provide them with satisfactory services by enabling them a successful deal. Agency Trading is more customer-centric. The reason is that their earnings depend on the commission received after a successful transaction. The more deals the agency does, the more commission they get.
Principal Trading
The main objective here is to make profits for the firm. These buy securities from the secondary market and store them expecting value appreciation and sell them. They do not have a customer-centric approach as they can make profits by themselves.
Although enabling clients to buy and sell through their inventory helps them make extra profits.
What are the types of trading?
Intraday Trading
Fundamental Trading
Technical Trading
Positional Trading
Swing Trading
What is difference between broker and dealer?
A broker is someone who enable trade for you whereas a dealer is someone who does trade for himself.
Conclusion
If you are a researcher yourself, a person who studies the market and trades yourself, Principal trading is the way for you. In case you want someone else to handle your money and make profits for you in exchange for a commission, Agency trading is the way.
Final Words
I hope this article about Agency Trading vs Principal Trading was helpful to you. Share this article with people you know who would want to know about trading.
If there is something I can add more to this article, let me know in the comment box below.
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