wealtheducation-what_is_a_market

What is a Market Maker?

A market maker is a special type of broker whose function is to “make” a market for a particular stock. The market maker will hold a certain number of stock shares in his or her inventory for the express purpose of being able to sell them to the person bidding to purchase them, or will add to his or her inventory by purchasing stock from a seller offering stock shares. In some cases, the market maker may directly just match up both the buyer and seller of the stock shares.

A market maker takes no commission on the sale, but instead makes a profit from the difference between the bid and ask price. The potential seller of the stock sets the price at which the share will be sold; this is the ask or asking price. The potential buyer of the stock will offer or bid a price at which the stock will be purchased. These two prices are rarely equal, and the market maker will only make a trade when there is sufficient difference to yield a profit in the sale. On heavily traded stocks, in which hundreds of thousands of shares trade in a single day, the market maker can still make a handsome profit even if this difference is very small.

Example of Market Makers are brokers providing CFDs.