Virtual Stock Market

Market Maker

Whenever an investment is bought or sold, there must be someone on the other end of the transaction. If you wanted to buy 1,000 shares of [x], you must find a willing seller, and visa versa. It's very unlikely you are always going to find someone who is interested in buying or selling the exact number of shares of the same company at the exact same time. This is where a market maker comes in.

A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place an order to sell your thousand shares of [x], the market maker will actually purchase the stock from you, even if he doesn't have a seller lined up. In doing so, they are literally "making a market" for the stock.

A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares.

A market maker makes money by buying stock at a lower price than the price at which they sell it. Note that because a market maker can take short positions, purchase and sale may be either way round - a market maker may sell stock and then buy it back later at a lower price. Therefore a market maker can make money in both rising or falling markets, as long as they correctly predict which way a stock's price will move.