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security. Since brokers are regulated and 
licensed, they have an obligation to act 
in the best interests of their clients. Many 
brokers can also offer advice on what 
stocks, mutual funds and other securities 
to buy. Due to the availability of internet-
based automated stock brokering systems, 
clients often do not have any personal 
contact with their brokerage firms.

A market maker makes a profit by 
attempting to sell high and buy low. 
Market makers establish quotes whereby 
the bid price is set slightly lower than 
listed prices and the ask price is set slightly 
higher in order to earn a small margin. 
Market makers are useful because they are 
always ready to buy and sell as long as the 
investor is willing to pay a specific price. 

This helps to create liquidity and efficiency 
in the market. Market makers essentially 
act as wholesalers by buying and selling 
securities to satisfy the market; the prices 
they set reflect market supply and demand. 
When the demand for a security is low and 
supply is high, the price of the security will 
be low. If the demand is high and supply is 
low, the price of the security will be high. 
Market makers are obligated to sell and 
buy at the price and size they have quoted. 
It is often the case that a market maker is 
also a broker. This can sometimes create 
the incentive for the broker to recommend 
securities for which he or she also makes a 
market. Therefore, investors should make 
sure that there is a clear separation between 
a broker and a market maker. 

How Market Makers Earn 


Market Makers profit by charging 
higher offer prices than bid prices. The 
difference is called the ‘spread’. The 
spread compensates the market makers 
for the risk inherited in such trades. 
The risk is the price movement against 
the market makers trading position.

The market maker may purchase 1000 
shares of IBM for $100 each (the ask 
price) and then offer to sell them to 
a buyer at $100.05 (the bid price). 
The difference between the ask and 
bid price is only $.05, but by trading 
millions of shares a day, he manages to 
pocket a significant chunk of change to 
offset his risk.

Market maker aim to buy at their 'bid' quote price & sell  at their 'ask' quote price. The difference between the 'bid' and 
'ask' price is the 'bid-ask spread', and that is the profit that market makers target.

Will sell 

@USD 110

Will buy 

@USD 100



Bid-Ask Spread