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What is a Paper Dealer?

Patrick Roland
Patrick Roland

A paper dealer has nothing to do with paper products used to print on, write on or read. Instead, this person deals with the commercial promissory notes known as commercial paper. A dealer purchases these papers and sells them to buyers, acting as a middleman for this type of investment.

Commercial paper shares many similarities with stocks and bonds issued by a company. These are short-term securities sold by banks and corporations in order to make money quickly. These notes have a maturity length of one to 270 days and feature the repayment date and amount on the note. There is a large amount of risk associated with these notes, because the original issuers do not back these notes with collateral. Instead, the buyer assumes that the money will be repaid strictly on the issuing organization's credit history.

Businessman with a briefcase
Businessman with a briefcase

Commercial paper has been traded since the 1800s and continues to be a popular way to acquire money quickly. More than 1,500 companies issued these promissory notes in 2009 alone. The popularity does not mean they are risk-free, as paper dealers learned in 1970, when Penn Central defaulted on more than $77 million US Dollars (USD), leaving investors without any repayment.

The paper dealer works much like a stock trader but focuses attention on these commercial papers. A paper dealer often works for a brokerage firm, because the firm has the capital to purchase large numbers of papers and has the capital to take the risk of working with them. The goal of a paper dealer is to purchase these commercial papers and sell them to buyers for a higher price. Generally, thousands of papers must be sold to turn a significant profit, so dealers must handle large quantities.

A paper dealer is used as a last resort for many issuing organizations because of the fees dealers frequently charge. Dealers charge different percentage points based on what institution they work for, but the generally require 0.05 percent of the sale price as a commission. This small percentage — one 20th of one percent — adds up to a sizable number when hundreds of thousands of commercial papers are being sold. Many times, an institution will feature its own paper dealer department, cutting out a step in the process and saving its from paying a commission.

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