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Market Makers #investments

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Market makers are often the topic of discussion on the boards of investment forums. They are often blamed for all sorts of things! The London stock exchange has members who are official market makers and guarantee to trade in certain stocks.

They hold a stock of shares and make a profit by selling at a higher price than they buy at. The price they sell at is the ask price and the price they are willing to buy at is the bid price, the difference between these two prices is the spread. In theory there should be a sell for every buy. That isn’t quite true.

Market

A good analogy of the way they work can be thought of as standing behind a counter in a shop buying and selling shares. The only control you really have is the bid price and the ask price. Now imagine the shop is full of people and they all want to sell. You might drop the price you are willing to buy at, the bid price and in theory the price you are willing to sell at, the ask price. Now imagine that you just dropped the bid price and cut it substantially. Some people would change their minds and not sell the stock you did buy, you would be getting a lot cheaper. When the rush subsided, then you could narrow the spread and encourage people to buy the stock that you have under the counter. These days the prices are adjusted by computer in a fraction of a second; the spread might be adjusted by the individual or company and they might make some decisions involving really large trades. Small trades are decided by computers. So the market is basically made by computers these days.

This week things seemed fairly quiet for me as I watched the prices, the only bit of excitement was Verona Pharma which made some good gains. Then yesterday, I lost about 2% on my portfolio. Verona Pharma dropped on profit taking, Taylor Wimpey was ex-dividend and dropped quite a lot and Premier Foods dropped quite dramatically on poor results. Today, Premier Foods has gained 1.5p so far, Verona is up a little and Taylor Wimpey will be paying me dividends. Solo Oil is up today too, so some of yesterday’s losses are offset by today’s gains. My overall return is 18% so annualised that’s still over my target of 10%. With the exception of Graphene Nanochem, they all went into profit briefly. I’ve held Tesco over 6 months now and I’m up 20%, so will watch that closely and consider selling.

There isn’t much point in selling until I have something in mind to buy. The only ones that look tempting at the moment are on the riskier AIM market. Immupharma is one I’m watching with interest.  Physiomics is also on the AIM and is one I have just started watching. Physiomics is up over 6% this morning, but the spread is a massive 12.5%.

Cable and Wireless had their final results out this week and they seem to be consolidating and so I’ll watch with interest, but they are definitely on my watch list. San Leon is going through a tough time, but despite the risk, they are on my watch list too. I think to get a good return I have to look at the AIM market.

That’s it for this week, nothing very exciting going on and I haven’t done any trading. I’m about 4% up so far this month, so the little surge after the election seems to be holding.

What do you think? Please share your thoughts in the comments box. You can also follow me on Twitter.

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  1. Pingback: Driving me crazy #review | Mike10613's Blog

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