WHEN LOOKING AT a stock — or any security, for that matter — most people are content to focus on the price at which it last traded. And for investors with the patience to wait for a really big move, that's generally sufficient.

But in reality, there are three prices in any given market. Market makers — those who make a living buying and selling at lightening-quick speeds — succeed or fail by looking not at stock XYZ's last trading price, but at where it is bid and offered right now.

A quick refresher: The "bid" is the highest price to buy at any given moment; the "ask" is the lowest price to sell. So if the Dow Jones Industrial Average futures contract is quoted at 8838 bid, 8848 ask, it means the lowest offer to sell (the "ask") one contract is 8848. If you entered a market order to buy (as most of the public does), you'd most likely be filled at the "ask." The same applies for a market order to sell, which in this case would likely be filled at 8838.

The bid/offer is critically important to market makers because they don't bet on direction. Unlike investors or discretionary traders, market makers profit merely by adding liquidity to a market. They bid at the bid (or slightly better) and offer at the offer (or slightly lower) and hope someone will trade with them. They aren't out to find the next Cisco (CSCO) or Microsoft (MSFT), but rather to consistently buy and sell small price fluctuations. They want to make the spread, or the difference between the bid and the ask. In the Chicago futures pits, this is called the "edge."

If you've never been on a trading floor or used Nasdaq Level II quotes, the concept of bids, offers and spreads can be difficult to visualize. If you're confused, think of the spread as being a profit margin. When the spread is wide, the profit potential — and the risk — are big. A small spread offers a thinner profit potential, but also less of a risk that you'll quickly get stuck with a losing trade.

For example, let's say the Dow Jones futures contract is quoted at 8838 bid, 8848 asked. You're a market maker. (You could be anybody from a hedge fund in Hong Kong to a college kid in Kansas). You tighten the market by bidding 8840 and asking 8846, and are now the best bid and offer. You're simultaneously offering to sell (short) at 8846 and bidding to buy at 8840. Notice that you aren't actually trading, but merely are indicating that you're willing to trade with someone who'll give up the edge. And unless someone is willing to trade with you (or at least tighten your market), you will remain the best bid/offer in that particular contract. Congrats, Soros: You've just made a market.

Seconds later, someone hits your price and sells you a contract at your bid price of 8840. It could've been a bank, a pension plan, an arbitrageur or even Joe Sixpack trading from his Pentium 486 in the middle of nowhere. Who it was is rather unimportant. What matters is that you're long at your bid price of 8840. What now?

Of course you'd like the market to rally (since you're long), but as a market maker, you're taking steps to reduce your risk in case it doesn't. So you keep your existing offer of 8846 and hope someone immediately buys the contract that you bought just seconds before. And in an active market (such as the Dow futures), that's not an impossibility.

In upcoming columns, I'll discuss how to follow up your initial trade when the market moves, but for the purposes of this introduction, let's assume that it doesn't. You bought it at 8840 and sold it at 8846 a few second later. You did so not by trading at the market, but by making the market. On one contract, six "ticks" in the Dow is $60. Not bad for a few seconds' worth of work.

Of course, the profit is gross...way gross. This is pretax, precommission, predata fees, prelunch, preparking, pre-everything. When the real costs of trading are considered, that $60 profit could be whittled down to $30 or less. And considering how this was a best-case example — that is, the market moved in exactly the fashion you'd hoped — the results might seem significantly less appealing. You made a profit, but a slim one at best. Yet this is the nature of market-making. The profits aren't big, so the volume can be huge, which makes controlling fixed costs — especially commissions — an absolute must.

Because making markets relies on taking the other side of customer orders, finding the right market to trade is almost as important as knowing how to trade in the first place. As we first pointed out a few years back, the spreads on most well-known stocks have shrunk significantly since the mid 1990s. Even now, at any point during the trading day, you can buy 100,000 shares of Cisco (CSCO) within two cents of their last price. These stocks aren't just liquid — they're downright waterlogged.

Any rational person would want to enter a business with big margins and exit businesses with small margins. So for stock investors looking to improve their game and explore basic market-making, I think futures, despite their high-risk reputation, are the best product to consider. Not only are their spreads more attractive, but, as we wrote last week, their leverage also offers a better use of investment capital than margin trades in the stock market. When it comes to commissions, listed options and futures commissions have dropped in recent months. Many firms are now offering schedules at less than $10 a trade.

Most important, recent advances in access to futures markets have done more than narrow the playing field — they've eliminated it altogether. Traders used to have to stand on the floor of the exchange and make bids and offers. In fact, in 1987, the CBOT even began offering a night session, in which floor traders would come in during the evening and trade in the pits. But these days, thanks to systems such as Globex (at the Chicago Mercantile Exchange) and A/C/E (at the Chicago Board of Trade), traders can literally sit in their pajamas and make bids and offers all day and night.

Next week, I'll outline a few of the specific markets I think offer the best opportunities for market-making, and discuss some of the useful trading techniques that differentiate market-making from any other type of trading. In the interim, those interested in this technique would be well served by researching futures brokers and perusing the electronic-trading sections of the CME and CBOT Web sites.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund.