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

Markdown

What it is:

Markdown refers to the negative spread between the price a broker charges a client for a security and the highest price at which that security is sold between brokers. It is the opposite of markup.

How it works (Example):

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 it Matters:

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.