An additional layer to the price at which a broker-dealer sells securities out of its inventory, as a compensation for its role as a principal in the trade, selling securities directly out the inventory it holds. Acting in a principal capacity, the broker-dealer will be compensated by selling a security at a price above the market price.
Markup = broker-dealer’s price – market price
It reflects difference (spread) between the broker-dealer’s cost of acquiring and holding a security and the selling price to the customer, where the latter corresponds to the current price of the security.
Determination of a fair markup may depend on a host of factors including to the price of the security, its type and availability in the market, the amount requested by a customer, expenses incurred and the amount of profit targeted by a broker-dealer.
The opposite scenario that involves selling a security at a price that is lower than the market price (in which case it is called a markdown).
