What is a Markdown?
If a broker wishes to increase his sales volume in a security or set of securities, he may choose to sell them at markdown prices. In other words, if a broker sells a security to a client at a lower price than the highest bid (selling) price in the securities market among brokers, the price is a markdown price.
To illustrate, suppose a broker sells shares of XYZ stock to his clients at $20 per share. He originally purchased the shares in the broker market at $40 per share. Therefore, the markdown on the shares he sells is -$20 ($20-$40).
Markdown should not be confused with markup, which is the positive spread between the lowest bid price in the brokers market and the higher price a broker charges to clients.
Why Markdowns Matter
The motivation for a broker to sell securities at markdown prices is to kindle trading activity among clients in the hopes that the multiple commissions on a higher sales volume will offset money lost in the negative spread.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Many types of insurance policies simply don't make sense for folks either because they're redundant, they solve a problem that really isn't a problem or for other reasons. Here's a list of...Read More →
Before getting a mortgage loan, make sure you know exactly what each of these five terms means... ...Read More →
Every year 3.5 million degrees are handed out to US students after they've completed their education coursework according to the U.S. National Center...Read More →