If you are a forex trader or interested in the industry, you may have heard the terms “principal trading” and “agency trading”. But what do they mean, and which is the difference between them?
In this article, we are going to talk about the definition of principal and agency trading and will understand their differences. This will help you to decide which one is the best to fit your trading requests. Discover the best forex trading platform in India for a head start.
Let’s start now.
What is principal trading?
When a brokerage company buys securities in the secondary market, they hold them for a while and then sell them. This is called “principal trading.”
The purpose of this is for firms to make money by selling the securities for more than they paid for them. When an investor buys and sells stock through a brokerage firm, the firm will use its own inventory to fill the order. With this method, firms earn more money than they would by just charging commissions.
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What is agency trading?
An agency transaction is a type of trade where your brokerage tries to find someone who wants to do the opposite trade as you. That is, if you want to buy, they try to find someone who wants to sell. The agency trading consists of 2 parts:
The first part of the agency transaction happens when your broker finds someone who wants to do the opposite trade as you at the same price you want to buy or sell at. The second part of the agency transaction happens after the trade has been completed and documented on the exchange.
The differences between principal and agency trading
The first difference between a principal trade and an agency trade is who benefits from the trade and who takes on the risk. With a principal trade, the stockbroker benefits and they take on the risk. With an agency trade, the trader benefits, and the risk is taken on by the individual investor.
Principal vs agency trading is different because it is done for different reasons. In the case of agency trading, people do it to trade stocks in the stock market. The stockbroker firm helps them do this by getting orders from other investors. In the case of principal trading, it is done to help the stockbroker make money. They might use their own inventory to do this, but usually, it is for a client with a large order.
In conclusion, there is a lot to think about when it comes to trading. You will need to decide what type of trader you are – principal or agency -and find the right broker who can help you reach your goals. Check out hy markets review here as an example of a reliable broker.
Remember to choose the style and tools that make you comfortable and give you the best chance for success. Trading can be a great way to grow your wealth over time, but only if done in a smart and informed manner. So, are you ready to get started?