Financial Education

In a principal trade, a fund manager trades through a dealer who guarantees the trade will be executed at a certain discount or premium to the current price in the market. The dealer acts as a principal, taking the risk related to the opposite side of the trade, and the discount or premium compensates the dealer for taking this risk. In return, the manager is able to minimize the opportunity cost of placing a large trade.

Although opportunity costs are minimized, total transaction costs related to a principal trade can be large due to both direct costs and the market impact (in the form of the discount or premium.)

For more information, see all articles on: Active Management, Investing in Stocks, Portfolio Management

See also:

What is a Bond?

Agency Trades

Crossing Trades Externally

Crossing Trades Internally

Continuous Markets