Could someone explain this sentence (how market maker may money)? (trading, fees)
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How Do Market Makers Earn a Profit?
Market makers earn a profit through the spread between the securities bid and offer price. Because market makers bear the risk of covering a given security, which may drop in price, they are compensated for this risk of holding the assets. For example, consider an investor who sees that Apple stock has a bid price of $50 and an ask price of $50.10. What this means is that the market maker bought the Apple shares for $50 and is selling them for $50.10, earning a profit of $0.10.
Question: How could market maker buy Apple share for $50? Nobody wants to sells at $50 (Ask price is $50.10).
My understanding is: the person wants to sell Apple at $50.10 (Ask price), and the person want to buy Apple share at $50 (Bid price), in order to make the deal, market marker has to spend $50.10 to buy Apple from seller then sell it $50 to buyer, therefore, market market loses $0.10, of course it does not make sense. I always thought, if there is "gap" between Bid price and Ask price, then there will be no deal, until someone changes mind to change Bid price or Ask price, e.g. seller is willing to lower Ask price from $50.10 to $50, or buyer is willing to increase Bid price from $50 to $50.10, then order can be executed. I just don't understand how can market marker makes money from price spread.
Its simple. The market maker does not pay the bid/ask spread that customers pay. They obtain shares at the base price and supply them to the markets. You make a faulty assumption though. If the stock's actual price is $50.00 flat, with a .10 cent bid/ask spread, then the bid price would be $49.95 and the ask price $50.05. The market maker profits .05 cents on each buy and sell order initiated by a customer.
Article from Investopedia. A market maker will have an inventory of Apple stock to make trades from. In your example market maker makes $.10 from the trade. There may be commission or other trading fees.
Article from Investopedia. A market maker will have an inventory of Apple stock to make trades from. In your example market maker makes $.10 from the trade. There may be commission or other trading fees.
While you may be correct, the example given seems unlikely. The bid price is usually set below the stock price, while the ask price is set above the stock price. This way the market maker profits on both ends of the trade. Otherwise, if the Bid price and stock price were identical, the market maker would earn zero profit on a trader's sell order. In my experience as a trader, you take a haircut on both ends.
How Do Market Makers Earn a Profit?
Market makers earn a profit through the spread between the securities bid and offer price. Because market makers bear the risk of covering a given security, which may drop in price, they are compensated for this risk of holding the assets. For example, consider an investor who sees that Apple stock has a bid price of $50 and an ask price of $50.10. What this means is that the market maker bought the Apple shares for $50 and is selling them for $50.10, earning a profit of $0.10.
Question: How could market maker buy Apple share for $50? Nobody wants to sells at $50 (Ask price is $50.10).
My understanding is: the person wants to sell Apple at $50.10 (Ask price), and the person want to buy Apple share at $50 (Bid price), in order to make the deal, market marker has to spend $50.10 to buy Apple from seller then sell it $50 to buyer, therefore, market market loses $0.10, of course it does not make sense. I always thought, if there is "gap" between Bid price and Ask price, then there will be no deal, until someone changes mind to change Bid price or Ask price, e.g. seller is willing to lower Ask price from $50.10 to $50, or buyer is willing to increase Bid price from $50 to $50.10, then order can be executed. I just don't understand how can market marker makes money from price spread.
I think this view of bid and ask is more static than actual. For example, if there is a sitting bid/ask at $50/$50.1, then someone who does a market buy will buy at $50.1. At the same time, someone who does a market sell woudl be selling at $50. The market maker can sort of match these trades at capture the $0.1, I think
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