Investing in the stock market, particularly in penny stocks, is a risky investment decision. Hedging the risk requires careful research into the company, stock history and the market makers controlling the stock prices. Learning about the market maker in control of a penny stock will help reduce the risk of buying and selling by watching the company or group of companies who are causing the market to continue moving.
What is the Market Maker?
Before it is possible to make the best use of market makers, investors need to understand what the term means and the impact on the market. The term refers to a particular individual, company or financial institution that is controlling a certain stock who are willing to buy and sell at the bid and ask price respectively and makes profit from the difference in bid-ask price also called spread.
A market maker is the broker, individual, company or institution that causes changes in the stock market. Depending on the situation, the market maker might even be government officials who are making changes to the market through legislation and new laws.
Regardless of the individual, company or group impacting the market, the key is to using information is the bid-ask spread provided in order books. The bid-ask spread is the buy and sell price the market maker provides to help move the market. A market maker is a bank, brokerage firm or company that buys certain stocks and holds it until an investor is willing to buy at the available sell price set by the company. As a result, the company or group is making the market for the particular stock.
The market maker provides liquidity in the stock market, which helps move stock prices during times when investors are not necessarily buying or selling. The bid-ask spread provided in order books gives investors better security because the bank, company or individual is making a guarantee on the prices.
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How the Market Maker Impacts Penny Stocks
Investing in penny stocks is always risky. The stocks are a low initial cost and a single penny up or down can have a dramatic impact on the portfolio. Understanding how the market maker of the stock impacts the rise and fall of the market will make it easier to control the risky elements.
The market maker of any particular penny stock will issue a bid-ask spread that states the buy and sell price the company, brokerage firm or bank is offering to the investors. The spread will give an idea of whether the company is willing to purchase the stock at a higher price than the original purchase price or if the cost of the stock is too high.
The company or brokerage firm controlling the penny stock will either cause a rise or fall in the market based on the buy and sell prices. Changes to the issued spread will have an impact on whether the penny stocks increase or decrease.
Using the Spread
By looking at the spread, investors are able to determine a fair market price for the penny stock and determine whether the price is appropriate for the particular stock. It is a research tool that helps identity penny stocks that are reasonably priced and are likely to increase based on the bid price set by the market maker.
Using the spread starts with identifying the company or group of companies impacting the stock and looking at the issued prices. Penny stocks are impacted more dramatically than other stocks so the spread helps reduce the risks associated with the investment.
Penny stock investments are impacted by the market conditions and factors that move the market. Making the penny stock market starts with the companies or firms that are willing to hold and control the stock. With careful research into the company and the market mover involved in the trades, the risk associated with a penny stock is reduced.
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