In trading terminology, what does 'principal' refer to?

In trading terminology, what does 'principal' refer to?

• A. A dealer member's own capital
• B. A client's investment portfolio
• C. The face amount of a bond only
• D. Trading on behalf of others

Answer: (A)

The term 'principal' in trading terminology specifically refers to a dealer member's own capital. This concept is foundational in understanding how trading operates within the financial markets. When a dealer engages in buying and selling securities, the profits or losses incurred on these transactions directly affect their own capital or assets, distinguishing this from acting on behalf of clients, which would involve using client funds rather than the dealer's own investments.

The other answers focus on different aspects of trading and investment. A client's investment portfolio pertains to the assets or securities a client holds, which do not belong to the dealer member directly. The face amount of a bond may indicate its nominal value but does not encompass the broader meaning of 'principal' in this context. Lastly, trading on behalf of others describes a broker's role, where they execute transactions for clients rather than using their own capital. Understanding these distinctions is crucial when navigating financial terminology and the roles within trading environments.