Principal Trade

A principal trade occurs when a broker-dealer buys or sells securities from its own inventory rather than acting as an intermediary between a buyer and a seller. In a principal trade, the broker-dealer takes on the risk of holding the securities on its books and may profit from the difference between the purchase and sale price. Principal trades can provide liquidity to the market but may also create conflicts of interest if not managed transparently.

Example

A brokerage firm executes a principal trade by purchasing shares of a stock from a client and selling them later at a higher price from its own inventory.