Market Makers-making the market flow

You might be asking your self “In a stock market a person is almost always able to buy and sell stocks but it isn’t the same for other types of assets.Why?”.The problem with those assets isn’t that there nobody is ready to buy the assets,the real problem is with price.In any market most deals can happen but the major concern and the deal breaker is the price at which the deal can happen.Market makers ensures that such an event doesn’t arise in the stock market.

Market Makers maybe a firm or an individual who is ready to buy or sell securities at any point of time during the trading period.Stock markets need to have a continuous flow of stocks throughout the day where trades can happen at any time .This makes the market liquid,fair and orderly.There may be instances when you might want to buy stocks that nobody is selling or sell stocks that nobody is ready to buy this is where a market makers comes in and saves the day!

Market makers are obliged to buy/sell the stocks listed in the market.They issue Bid-offer prices throughout the day,for all the stocks listed at which they are ready to buy and sell each individual stock. The bid price is the price at which they are ready to buy a particular stock from anyone who wants to sell.The offer price is the price at which the market maker is offering the stock to be sold.In most of the stock exchanges the market maker is obliged to quote a two way offer,i.e they cant only offer to buy a stock but not sell it and vice versa . Market makers are not non-profit organizations,so they charge a commission and fee.Similar to any of the retail businesses they try  to “buy low and sell high” the difference between bid and offer price is called spread ,which is their profit.When there are more market makers the spread is likely to be narrower.

For example: If David wants to buy 1000 share of EVEN Ltd and the bid-offer price is 120 and 120.5 then David can buy the stocks at Rs,120 and sell it at 120.5 at the same instant.The spread which is .5 here is the profit for the market makers.The market maker would be in a loss if the prices go down to say 199. Hence,they  are compensated by charging a  commission and fee for taking this risk of a sudden drop in price.

A stock broker usually quotes a price that is mid market,i.e somewhere between the offer and bid prices.If a stock is quite popular then the bid-offer spread is narrow and for a stock that isn’t so common the spread will be wider.During the day the spread may become wider according to conditions.If the market becomes volatile then  the spread may become very wide very fast.

They serve an important role in the financial market,as they help market be liquidity,risk-free and facilitate the pace at which the investors can enter and exit the market.

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