What is a principal trade?
This is when a brokerage house buys securities on the secondary market and holds on to them long enough for a price appreciation. They can then sell them later on to make money.
Where have you heard about principal trades?
If you're an investor, this is one of the two main types of trade you'll encounter. The other is agency trading.
What you need to know about principal trades.
When an investor buys and sells stock through a brokerage firm, this firm acts as the principal to the trade. It will use its own inventory, first of all to find out whether or not the shares are available to sell. If they are, the firm will sell the shares to the investor and report the transaction to the right exchange. Reporting ensures that the proper regulations are followed and that the firm’s clients are safeguarded. The firm will then earn money on the commission it charges for these trades.
Find out more about principal trades.
In principal trading, brokerage firms can make money from the bid-ask spread.