Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price-Taker

What it is:

Price-takers, by definition, are not price makers. That is, they are not guaranteed profit makers, and they may even choose to make more product even if it’s not profitable to do so, just so they can maintain market share or achieve other objectives. Thus, investors who can distinguish price-takers from price makers can more easily identify steady profit producers. Price-takers are generally not leaders in their industries.

How it works (Example):

For example, let’s say Company XYZ makes tires that sell for $150 each. Company XYZ makes 50,000 tires a year.

Because there is a lot of competition in the tire market, and because profits and demand are flat, Company XYZ is not in a position to dictate the price of tires in the market. It must price its tires competitively in order to attract customers, because there are a lot of other substitutes for Company XYZ tires. Thus, Company XYZ can’t necessarily raise the price of its tires without reasonably expecting to lose some customers to competitors, either. Company XYZ does not really have an impact on the general market price of tires and must therefore work within existing market prices.

Similarly, price-takers in the trading market cannot dictate the price at which they will buy shares or sell shares; they are constrained by the broader supply and demand requirements of the market. In turn, the buy and sell decisions of price-takers have very little if any effect on the market prices.

Why it Matters:

A price-taker is the opposite of a price maker, which is a monopolistic company that can dictate the prices of its goods because there are no substitutes for its goods. In the trading world, a price-taker is a stockholder who does not to affect the price of the stock if he or she buys or sells those shares.