DEFINITION of market maker
A market maker is an individual or institution that buys and sells large amounts of a particular asset in order to facilitate liquidity.
WHAT IT IS IN ESSENCE
Market makers tend to be in control of a certain amount of the assets that. By displaying a buy and sell quote and executing trades at that price very quickly, market makers are a simple way to place trades.
They are most common in shares trading, but can also act in other markets.
How it’s possible to buy or sell a stock at a moments notice? The speed and simplicity at which it can be done are easily taken for granted. Place an order with your broker, and within seconds, it is executed.
This is amazing!
Whenever is the situation of buying and selling, there must be someone on the other end of the transaction.
When someone wants to buy or sell a product, they need to make their way to an exchange where buyers and sellers meet.
The price they can trade it depends on the supply and demand of the product at the moment. And this is the bid and ask spread.
A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price.
HOW TO USE
This is good for you because when you place a market order to sell your shares, the market maker will actually purchase the stock from you, even if he doesn’t have a seller lined up.
The same process happens when placing a market order to buy shares of stock. In doing so, they are literally “making a market” for the stock.
Without market makers, it would take considerably longer for buyers and sellers to be matched up with one another. It will be harder to reducing liquidity and potentially increasing trading costs as it became more difficult to enter or exit positions.
To recompense the risk of buying an asset that may fall in price market makers maintain a spread on the assets that they enable you to trade.
For example, a market maker may offer to purchase 100 shares from you at $100 each, and then offer to sell them to a buyer at $100.05 (the bid price). Though this is only a $0.05 difference, in high-volume trading, the profits will soon add up. Market makers are very useful for the pricing of some illiquid shares.