To understand if market making can be profitable to individuals, we need to understand what market making is, and the benefits that it could offer to traders. A better understanding of market making would help you to know if it is profitable to traders. We will explain the concept of market making and how traders can use the model to make profits in their trading or business. Market making is simply a strategy where traders buy or bid for stocks at lower price in a trending market and resell them at higher prices. Let's make it simple, if apples are popular demands in the current market, you can decide to go the apple firm and bid for apples at $10 and resell them at $11. Your profit from making the market is $1, your gross profit depends on the total turnover that you made, the trader who uses this strategy to make profit is called a market maker.
Individual traders makes profit by market making by monitoring the trending market, and placing bids on stocks at lower prices and reselling them at higher prices upon customers' demand to make turnover and profit. Market making could be done by traders but it is mostly done by brokerage firms that makes profit by monitoring current market demand and price. Individual traders who make profits by market making are called market makers. How can market making give profit to an individual traders? traders should understand the current demand for a stock, the stock price, and the future value of the products. These information will help a market maker or trader to make bid when there is demand and favorable price to make profit.
Let's give an instance where an individual trader makes profit by market making. If X phone sells for $300 in the current market, and a potential buyer demands for 1000 pieces of X phones from a market maker, the market maker can place an order from the firm. He may decide to place an order or bid for 1000 pieces of X phones at the bid price of $299 and resells to the buyer at the current market cost of $300 per X phone. The profit he made from a phone is $1 and the profit he made from selling the 1000 pieces is $1000 which a significant profit.
Market making has become a profitable kind of trading for individual traders and brokerage companies. The profit margin depends on the turnover of the products you sold, and also depends on the stability of the stock you are selling. Individual traders who are involved in market making helps to liquidate the market, this means that they help to increase the circulation of stocks or assets between firms and consumers. This trading strategy helps to stabilize the cost of commodities in the market.
However, individual traders can also make loss by market making if the trader does not monitor the market trend. He can make loss, if he fails to observe a sudden decrease in demand of a stock. The trader can buy a trending product on at a higher cost, then the market value and cost of the product he bought can drop suddenly. He would sell the product at a value lower than what he bought the stock from the firm.
For instance, if the recent value of X gadget in the market is $101, the market maker can place a bid for 1000 quantities of X gadgets at the rate of $100 per gadgets. Suddenly, the market value of the gadget can fall to $80 per gadget, if the trader sells the gadget at $80 dollar, he would have a total loss of $20, 000. Therefore, it is important to monitor how market trends flow to make good returns.
This trading strategy can give profit to individual traders if they monitor how the market flows. They should understand the volatility and future worth of the items they want to buy. This monitoring can be aided through algorithmic trading, a process where computer uses input information to help the trader make the purchase at a favorable profit. There could be losses if the trader does not understand the market volatility, using market making strategy to trade without proper assessment of the market volatility could lead to capital loss.