Buying or selling stock at a moment’s notice is what happens when you trade with your broker. Did you ever wonder how this happens?All this happens efficiently and smoothly because market makers are there to take charge.
A market maker is a bank or brokerage agent which can be a company or an individual. When you place a market order to sell or buy shares, it is the market maker who actually buys the stock from you and then later he will find an appropriate seller to sell them. In this way, they are ‘making the market’ to be able to sell their stocks.
Market makers are the ones who reduce the time period in the entire buying and selling process. Without their presence in the trading scenario, it would really take a substantial time for sellers and buyers to look for ideal matches for their requirements. Not having market makers would even increase liquidity and trading costs. Entering and exiting from the trading scene is also because of them.
There are basically 2 types of market makers –
Principal Market Makers(PPM)
They buy and sell quotes for long periods almost spanning 18 months from the time of initial commencement.
Additional Market Makers (AMM)
these market makers buy and sell quotes for a period spanning almost 1 year from the time of commencement.
Role of a market maker
The role of a market maker is multi-faceted and is very risky too. At any given time, the market maker needs to be completely alert and aware of the market scene to be able to earn good profits. Here are some of the aspects market makers need to look into-
- competes for customer orders in the market by screening quotations for buying and selling stocks and shares.
- act as catalysts in the secondary market to enhance stock liquidity.
- promote long -term growth in the market
- ensures that there is a confirmed buyer for every sell order and seller for every buyer for all the stocks and shares that he has.
- making profits from the differences in the bid and ask price
- to provide liquidity for the company’s clients to get commissions in return
- facilitate trading between brokerage firms
- enhance and increase movement in fewer trades stocks futures and options.
Donning the role of a market making is not as easy as it seems. To compensate for the huge amounts of risks the company or individual is exposed to, they need to maintain a market spread on all the stock they cover. This difference between the buying price of the security and the price at which the company is willing to sell – “Market spread” is how they actually earn their money. To learn more about trade and markets, log into the Millionaire Blueprint website.