| Market Makers are Over The Counter Market dealers | | | | XYZ stock at .01. This will likely cause brokers to |
| who compete to buy and sell shares of stocks | | | | send their orders to the MM with the best price. So |
| including some of the best penny stocks. Following | | | | the second Market Maker with the spread of .01 in |
| simple supply and demand theory, they set their own | | | | this example will receive the orders from brokers. |
| buy and sell prices, called "bid" and "ask" respectively. | | | | Now, what is often the case, one MM may be more |
| As an example, a typical market maker may set his | | | | interested in buying than selling. Therefore, he would |
| bid at.48 and ask at.50... meaning he will buy shares of | | | | raise his bid but keep the ask price the same. |
| this example stock at .48 and sell them at .50. | | | | Another Market Maker may also enter realizing there |
| Market Makers [MM] profit from the difference | | | | may be a growing appetite and demand for a stock, |
| between the bid and the ask price, which is called the | | | | and raise his bid.01 sent higher to buy up all the |
| spread. So you may be wondering what keeps a MM | | | | shares available. Why? Because he may believe the |
| from setting the bid price way below the ask? The | | | | stock will soon be trading higher due to a higher |
| answer is; many Market Makers do just that. | | | | perceived demand. Again, it falls into the supply and |
| However, while Market Makers do get to choose | | | | demand equation. Of course other Market Makers |
| how they want to set the spread, there are | | | | also have a choice, they can either match the going |
| competitive pressures. | | | | price or not. This process creates a competitive |
| Lets take the example of one MM setting the spread | | | | environment, but can lead to dramatic surges from |
| of .02 of XYZ stock with a bid of .48 and ask of .50. | | | | time to time. |
| Another MM may be willing do keep his spread on | | | | |