Updated on March 14, 2023
Market makers refer to a firm, agencies or individuals who give ‘buy’ and ‘sell’ quotes in markets for stocks along with their volume for creating greater liquidity. In normal trading, the ‘buy’ and ‘sell’ quotes can have a huge difference (of even a few rupees) which can create liquidity issues. Market makers in such situtions display buy and sell quotations for a guaranteed number of shares. On receiving an order from a buyer, they sell shares from their own inventory to complete the order. Market makers can be large brokerage houses which provide services for investors.They provide the required liquidity and strength to markets and profit from the difference in the bid-ask spread.
They are stock market participants who earn their profits on high trading volumes and not on margins.
Importance of Market makers
a) Market makers create the much needed liquidity as well as demand in markets.
b) Market makers make the market safe, secure and also help in lowering the volatility.
c) They also indicate the interest in a stock as in absence of market makers in a stock, it becomes prone to risk and high fluctuations.