Final answer:
Investment dealers act as principals in primary markets by directly purchasing and underwriting new securities from issuers and selling them to investors, taking on risk to facilitate the capital-raising process for companies issuing stocks or bonds.
Step-by-step explanation:
Investment dealers act as principals in primary markets when they purchase securities directly from the issuing company and subsequently sell them to investors. In this role, they are not just acting as intermediaries; they are effectively underwriting the issuance of the stock or bond. The investment dealer takes on the risk of buying the securities, with the hope of selling them at a profit to their clients. This process is essential for companies looking to raise capital directly through share offerings or bond issuances. In these transactions, the investment dealer plays a critical role in determining the offering price of the securities and assuring the issuer that a certain amount of the newly issued securities will be sold. By doing so, they provide a vital service in the flow of financial capital, facilitating the company's ability to obtain funds needed for expansion or other corporate activities.