Word of the Day – Dealers vs. Brokers

Have you ever wondered why sellers of automobiles and trucks are called “dealers,” while sellers of stocks are called “brokers”?

What’s the difference between these two kinds of sellers? 

Dealers

A car dealer is a middleman who sells a car to a car buyer and then pays a lower price to the car manufacturer in order to profit. A car dealer buys at wholesale prices and sells at retail prices.

A grocery store owner does the same thing. They buy low at wholesale prices from suppliers and sell high at retail prices. As a result, these dealers wind up purchasing items that make up their inventories.

These two sellers above are examples of one-sided dealers. They often sell through Main Street storefronts.

Brokers

Securities dealers, on the other hand are two-sided dealers. They do not carry inventories of products.

Instead, securities dealers both buy and sell securities at retail prices.

Here is how one group of securities dealers, i.e., stock brokers, make their money:

Stock brokers post both bid (buyer) and ask (seller) offers on their web sites. These bid and ask offers are retail prices that are set by each buyer and seller.

Stock brokers then create a wholesale price when they can match a buyer’s and seller’s price offers somewhere in between the range of prices set by the buyer/seller’ bid-ask spread.

Securities dealers are part of an industry that deals in trillions of dollars and many other currencies every day. They are part of the Money Market sector of our global economy.

Middlemen

Both dealers and brokers are middlemen in an exchange between two parties. Those two parties are makers of a product (corporations and wealthy investors etc.) and the buyers of a product.

But those two kinds of middlemen make their money in different ways—as one-sided dealers who buy at wholesale prices and sell at retail prices, or as two-sided dealers who set wholesale prices and collect fees from both sellers and buyers.

Most Main Street storefronts and malls are occupied by one-sided sellers, while most two-sided sellers operate on the Web. However, some one-sided sellers are found only on the Web, e.g., Facebook’s Marketplace or Twitter.

Many large and some smaller corporations will operate both on the Web and through local stores. They may be one-sided dealers like Walmart and Target or Apple.

Or they may be, two-sided dealers like Amazon or ebay or Charles Schwab.

The latter three giant corporations are brokers who take fees from sales of products that have different bid and ask retail prices set by buyers and sellers.

The “wholesale” price for a particular product, e.g., concert tickets on 3bay, or a toothpaste brand on Amazon, or an ETF on Schwab will be the average price paid for these products over a specified time period.

Observations

These two ways of selling are two ways of creating “market” prices for products being bought and sold.

However, there is a third way of selling too. These days that way is largely represented in the United States by small business owners who sell services.

That way is to cut out the middleman, and sell directly to clients or customers.

More and more service professionals are choosing to sell direct by using the internet rather than Yellow Pages. However, many service professionals under price their services by not fully including all their indirect costs of doing business on their billing.

Small business sellers of goods in the U.S. cut out the middleman when they sell direct on street corners, farmers markets or from food trucks or other wholesale outlets. Here too these vendors may make more or less money by the way they price their goods.

In other countries, especially those who depend upon tourism for revenue, it is still common for many direct sales to made in public places or local neighborhoods or at outdoor bazaars. Lack of capital to expand is often an insurmountable problem for these self-employed sellers.

I wrote this post to help  consumers be aware of differences when negotiating prices when shopping with dealers, brokers, or when making direct sales purchases. Also, this is for self-employed business owners to consider which of these categories their business fits into.