Market maker.
In plain English
A market maker posts a bid (what it will pay) and an ask (what it will sell for) and commits to trading at those prices in a stated size. That standing offer is what lets you sell a stock instantly instead of waiting for another investor who wants exactly what you have. The market maker profits from the spread between bid and ask and manages the risk of the inventory it takes on. Registered market makers on an exchange accept obligations to keep quoting even when conditions get rough. Their willingness to quote is a large part of what people mean by liquidity.
01Why it matters
The spread a market maker quotes is a real cost you pay on every trade, and it widens exactly when markets are stressed and you most want out.
02The math, step by step
Say a market maker quotes 50.00 bid and 50.04 ask. You sell 200 shares at 50.00 and someone else buys 200 shares at 50.04. The market maker collects 0.04 a share, or 8 dollars, for taking both sides of the trade.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not the same role. Your broker routes your order. A market maker is the counterparty that actually takes the other side. Some large firms do both, which is why order routing and execution quality appear in a broker's disclosures.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice