Markup

What is a markup?

A markup is the amount added to the cost of a product or security to determine its selling price. It represents the seller’s gross profit margin and can be expressed as a fixed amount or as a percentage of cost.

Markups in investing

In securities markets, a markup is the difference between the price a broker‑dealer paid for a security (from its own inventory) and the price charged to a customer when the broker acts as a principal.
Broker‑dealers earn their compensation through this spread rather than by charging an explicit commission when acting as principals.
Example: a dealer purchases a bond from the market for $99 and sells it to a retail customer for $100 — the $1 difference is the dealer’s markup.

Markups in retail

In retail, a markup is the amount added to the production or purchase cost to set a selling price. Retailers may use a simple fixed markup or a percentage over variable costs (variable cost‑plus pricing).
Example: an item that costs $50 with a 50% markup sells for $75.

Markups vs. markdowns

Markdown (investing): Occurs when a dealer buys a security from a customer at a price below current market value or offers a customer a price lower than the dealer bid. Dealers may use markdowns to stimulate demand or clear inventory.
Markdown (retail): A deliberate reduction in a selling price, commonly used to clear seasonal or obsolete inventory.

Why markups exist

Provide compensation and profit to dealers and retailers.
Reflect inventory risk borne by dealers (price can move between the time they acquire a security and the time they sell it).
Increase the bid‑ask spread for dealers acting as principals; the difference between the market spread and the dealer’s charged spread is the dealer’s gross profit.

Transparency and special considerations

Dealers are not always required to disclose the amount of the markup; customers may see only a transaction fee. This can obscure the dealer’s true cost and profit.
If a buyer immediately resells a security, they may incur a loss equal to the dealer’s markup unless market movement offsets it.
Dealers compete by reducing markups; buyers can sometimes compare dealer prices using bond transaction reporting services and market data to judge fairness.

How to protect yourself

Ask whether the broker is acting as agent (commission) or principal (markup).
Compare quoted prices across dealers or public transaction reports.
For bonds and many fixed‑income securities, consult market data sources that show recent trade prices to estimate typical spreads.

Key takeaways

A markup is the difference between a seller’s cost and the customer’s price, used by dealers and retailers to earn profit.
In investing, markups arise when broker‑dealers sell from inventory and may not be separately disclosed.
Markdowns are price reductions used to stimulate sales or clear inventory.
Compare prices and confirm whether a broker is acting as principal to assess whether a markup is reasonable.