Bid, Ask, Spread

Handling all those orders is very valuable service, and market makers (and specialists) are appropriately rewarded. Suppose you want to sell ABC and the last trade was at $6.25. When your "market" order (an order to sell at the going price) goes out on the Nasdaq system, the companies that make a market in ABC will bid for the right to buy your shares. If they see a lot of orders for ABC, they might bid $6.50 for your shares, because they know that they can turn around and ask $6.60 to sell them. If they see a slackening of demand for ABC, they might only bid $6.00 and ask $6.10. On the NYSE, specialists won't match orders for the exact same price. They will match buy orders for slightly more than the seller is asking.

The difference between the bid and ask price is the spread and it goes into the pockets of the market makers and specialists. The amount of spread will vary depending on the volume of shares traded. For a very heavily traded stocks, market makers will compete vigorously for the business and the spread will be quite small. For thinly traded stock, market makers may demand a very large spread because they may have to hold the stock for a long time before a buyer comes along, increasing the risk that they won't be able to sell it for as much as they paid.

Investors can set their own bid or ask prices, too, by placing orders to sell or buy only at a specific price. Market makers and specialists keep a close eye on these "open" orders, executing them when conditions are met, and using them to gauge demand for the stock.