Price improvement is the process of obtaining a more desirable price when buying or selling an asset. Sellers who are attempting to generate the highest amount of profit from a transaction achieve this type of improvement when interested buyers submit higher bids in an effort to secure an asset they find desirable. Buyers also experience price improvement when they are able to obtain an asset for a price that is less than the original amount requested by the seller.
In terms of purchasing investments, buyers obtain a price improvement when the order is filled at a price that is less than originally anticipated. This means that the asking price that the broker was able to negotiate as a firm quote was lower than the price that the investor was willing to pay. The result is that the investor gains ownership of an asset for less money, and now has additional funds that can be utilized to purchase other assets that will hopefully generate some amount of return.
While there is sometimes a perception that it takes working with a discount broker to obtain a price improvement, that is not the case. A full service broker can often identify and secure investments for clients at prices below those identified by the investor. The key is to work with a broker who is capable of investigating all possible avenues to fill the investor’s order, identify the one that is the most cost effective for the investor, and execute that order while those shares are still available at the lower rate.
The process of price improvement may also work in the favor of an investor who wants to sell shares of a given stock. In this scenario, the broker will attempt to obtain the best price possible for those shares. Often, the difference may be no more than a small fraction per share, but that small fraction applied to a lot of one thousand shares could translate into a tidy amount of extra profit for the sale.
Obtaining a price improvement for an investor does sometimes mean that the broker earns a little less on the transaction. The benefit is that investors are more likely to work with brokers who consistently save them money on purchases while also earning them a little extra on sales. From this perspective, it is in the best interests of brokers to seek the most advantageous pricing for their clients, since it promotes loyalty and is likely to lead to an increased number of transactions that are subject to some sort of fee or commission.