Introduction
A market maker is an entity/company or an individual who decides the quotes to purchase or sell a financial instrument. Market makers help investors create a market for the purchase or sale of assets/securities.
Understanding Market Maker
Market makers are companies employed by the stock exchanges to improve the stocks' liquidity and trade volume in the market. However, they have specific exchange as per the laws set by the country securities market regulator that they will be required to operate under.
While market makers can also be individual agents, they often work in large numbers under a common large entity to deal, i.e. facilitate the sale and purchase of a large number of securities and assets in the market.
Market makers are required to quote the purchase and sale prices for the mentioned number of stocks. Once the market maker receives an order from an investor, the entity ensures that the order is completed by selling its own holdings.
In order to make up for the risk, market makers are given the benefit of offering a two-way quote in the market. The two-way quote will include a buy price and sell price together. The market makers make their profit from the difference between the buy and sell price.
Factors to Consider
Market makers help stock exchanges to not only improve the liquidity of stocks in the market but also increase the volume of shares being traded. Also, the stock exchanges have been able to bring down the time required for the execution of an order and the costs of transaction involved in trading the stocks.
Brokerage houses are one of the most common types of market makers. Investors trade through these brokerage firms as they offer effective services for the purchase and sale of stocks in the market.
