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What is a Broker-Dealer?

A broker-dealer is an entity that engages in the trading of securities, and can act as both an agent and a principal.

Brokerages, investment banks, commercial banks, and other financial institutions can act as a broker-dealer. Broker-dealers are important to the liquidity of the markets, since they hold inventories of securities for various amounts of time to help facilitate trading, short-selling, and margin accounts.

Investment advisors and registered representatives must be affiliated with a broker-dealer firm to be approved for securities business by the industry regulatory authority FINRA. An individual advisor with a large book of business can act as his or her own broker-dealer with the help of a custodian entity.

An increasing number of Registered Investment Advisors are choosing this path for the independence and lack of restrictions it provides.

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Keywords: liquidity, FINRA, investment banks, broker-dealers, Registered Investment Advisor (RIA), custodian, investment brokerage houses,