RE: RE: National BankWhat is aMarket Maker?
You probably take for granted thatyou can buy or sell a stock at a moment's notice. Place an order with yourbroker, and within seconds, it is executed. Have you ever stopped towonder how this is possible? Whenever an investment is bought or sold,there must be someone on the other end of the transaction.
If you wantedto buy 1,000 shares of Disney, you must find a willing seller, and visa versa.It's very unlikely you are always going to find someone who is interested inbuying or selling the exact number of shares of the same company at the exactsame time. This begs the question, how is it that you can buy or sellanytime? This is where a market maker comes in.
A market maker is a bank orbrokerage company that stands ready every second of the trading day with a firmask and bidprice. This is good for you, because when you place an order to sell yourthousand shares of Disney, the market maker will actually purchase the stockfrom you, even if he doesn't have a seller lined up. In doing so, they areliterally "making a market" for the stock.
How do MarketMakers make their Money?
Market Makers must be compensatedfor the risk they take; what if he buys your shares in IBM then IBM's stockprice begins to fall before a willing buyer has purchased the shares? Toprevent this, the market maker maintains a spread on each stock he covers. Using our previous example, the marketmaker may purchase your shares of IBM from you for $100 each (the ask price) andthen offer to sell them to a buyer at $100.05 (bid). The differencebetween the ask and bid price is only $.05, but by trading millions of shares aday, he's managed to pocket a significant chunk of change to offset his risk.
The above from about.com
National Bank was buying and selling at 10.01 and 10.02 today. That's OK by me as it makes for stock liquidity. Although I am long on HEE and HEX .
any thoughts appreciated
Gina