Here, we will discuss principal trading in detail. In case of Principal trading, a brokerage firm buys securities/stocks from the market and holds them rather than selling it immediately to the investor/client. However, at a later stage the brokerage firm will sell those securities to its clients. The whole idea behind this is to earn price appreciation of the stock till the time period it is with the broker and commission, once it is sold to the client.
Brokers are required to intimate it to the exchange whether they are providing principal order or an agency order. Usually, whenever their client buys stock, the broker tries to sell the same from its inventory rather than buying it from the market because in the former case they can earn higher profits because of both appreciation and the commission.