Investors have it easy when it comes to the buying and selling of securities. If an investor is interested in acquiring shares of stocks of a particular company, all he needs to do is order his stock broker to buy a specified number of shares and it automatically happens. The same thing goes for selling of securities. Just give an order to your stock broker and automatically your order is executed. Sounds simple? Well, it isn’t.
It’s almost always impossible for a stock broker to find someone who is willing to buy the exact number of shares you want sold for the exact price that you want. If the stock market were to operate that way, the number of trades per day would most certainly be minuscule compared to the actual trading volume in this day and age. So how does it happen? How come trades are executed according to the client’s wishes and in a timely manner? Well, it happens because of the market makers.
A market maker can be a person or a firm who holds a number of stocks available for trading and is willing to buy other stocks as well as sell the ones he/it has, for profit. The market maker makes sure that the bids of both buyers and sellers are matched by staking part of his own stocks. If a stock broker wants to sell 1,000 “X” company shares on his client’s behalf, the market maker will buy those shares and look to sell them to another stock broker.
As with any business, especially ones that deal in securities trading, there is an amount of risk involved. If “X” company’s stocks start going down in value and a share holder wants to sell his stocks, the stock broker will execute the trade and sell it to the market maker. So how, then, can the market maker hope to make money if he’s forced to buy securities whose value is falling sharply? The answer is in the margins.
If a stock holder for “X” company wants to sell 1 million shares at $11.00, the market maker can buy that number of shares for the given amount while simultaneously looking for a buyer who’s willing to purchase stocks from “X” company for $11.05. That may not seem like a lot of money, but in dealing with hundreds of thousands, or even millions of shares, the market maker stands to make a good profit if things go according to plan.
