Role of market traders

Question 1

What does it mean when traders “provide liquidity”?

Answer 1

They ensure assets can be bought or sold quickly without large price changes.

Question 2

How do traders help with price discovery?

Answer 2

By constantly buying and selling, they help reveal the fair market value of assets.

Question 3

What is a market maker?

Answer 3

A trader who quotes both buy (bid) and sell (ask) prices to keep markets active.

Question 4

how do market makers make money?

Answer 4

They earn the “spread” between the buy and sell price.

Question 5

What is arbitrage in trading?

Answer 5

Profiting from price differences by buying in one market and selling in another.

Question 6

What is hedging?

Answer 6

Using strategies (like derivatives) to reduce risk in a portfolio.

Question 7

What is speculation?

Answer 7

Trading assets in hopes of profiting from future price changes.

Question 8

How do traders transmit information to markets?

Answer 8

Their reactions to news influence prices, signaling value to other participants.

Question 9

How do institutional traders support market infrastructure?

Answer 9

They work with exchanges and clearinghouses, helping maintain market stability.