In a nutshell, a stock market is a non-physical place where people that want to sell shares in a company can find people that want to buy those shares (this is explained in depth in another article). It’s an almost perfectly balanced equation. But if any of those elements are removed, the stock market wouldn’t work. If there were people looking to sell their shares but there was no one to buy them, it’d be a bit like an eBay auction where the auction ends with no bids and the item unsold.
It’s incredible to think that at the exact moment an individual investor wants to sell their share(s), someone somewhere in the world wants to buy the exact amount of shares on offer at that exact moment?
Actually, there isn’t someone waiting to buy shares. One has to remember that the stock market doesn’t just consist of blue chip companies that are well known, but also many small obscure companies. But somehow, even those obscure shares can be sold on the stock market. How?
The answer is ‘market makers’. These are financial institutions that are ready to buy up shares that are on sale that otherwise would remain unsold. Market makers operate under certain rules set by the stock exchange and are obliged to buy a certain amount of shares. There may be multiple market makers operating in the stock market who compete against each other to make things competitive. Market makers are often financially incentivised to play this role in the stock market. The alternative would be to wait indefinitely to buy and sell shares. Market makers play a crucial role in the stock market and ensure the markets are highly liquid.
P.S If you enjoy learning about the stock market and want to learn how to trade on the stock market, consider signing up to the 30 Day Trading Programme. The programme is free and you can learn at your own pace.
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