Who Are Market Makers and How Do They Influence Stock Prices? (2026 Complete Guide)

Ever wonder why you can trade a stock in seconds when there appears to be very few around? Why a stock prices only a few paise when thousands of buy/sell orders are performed?

Market Makers, the unseen ones that maintain the efficiency of financial markets, are behind this seemingly flawless trading experience.

A lot of new investors think that buys and sells cause stocks to move. That’s correct, but professional traders understand that liquidity providers, institutional investors, and market makers are also huge contributors to the stability of the market. In their absence, investors would have difficulty making trades, and spreads between trade bid and trade ask would be much wider, as well as volatility.

Understanding the market maker will transform your perception of price action if you ever thought the market “went against you” after you hit that sell or buy button.

This extensive guide will help you understand what market makers are, how they work, how they function in the Indian stock market, the IPO of SMEs, the process of liquidity management, price discovery and whether market makers do stock price manipulation or not.

Quick Answer

Market Makers are financial institutions or registered companies that can continuously offer quotes for the purchase and sale of securities to provide liquidity and smooth trading. One of the key ways they make money is through the spread between the bid price and the ask price. They also help to provide a more efficient price discovery process and minimize market volatility.

What Is a Market Maker?

A market maker is a registered financial institution or trading firm that continuously places both buy and sell orders for a particular stock or security.

Its primary objective is simple:

Provide liquidity
Reduce execution delays
Narrow bid-ask spreads
Support efficient price discovery

Think of a vegetable wholesaler in a local market.

Even when customers aren’t buying, the wholesaler is willing to buy vegetables from farmers and sell them to retailers.

Similarly, market makers are always prepared to buy or sell shares, ensuring there’s almost always someone on the other side of your trade.

Market Makers Meaning in Stock Market

In simple words,

A market maker is a liquidity provider that continuously quotes both buying and selling prices so investors can trade without waiting for another buyer or seller.

This is why they are often called financial market intermediaries.

Why Are Market Makers Important?

Imagine a stock where nobody wants to buy.

You decide to sell 500 shares.

Without a market maker:

Your order may remain pending for hours.
The price could drop sharply before execution.
Liquidity disappears.

With market makers:

Someone immediately buys your shares.
Trading continues smoothly.
Prices remain relatively stable.

Their presence improves overall stock exchange liquidity and enhances investor confidence.

How Market Makers Work

The market making process revolves around continuously quoting two prices:

Quote	Meaning
Bid Price	Price market maker buys from traders
Ask Price	Price market maker sells to traders

Suppose:

Bid = ₹500

Ask = ₹501

Difference = ₹1

This ₹1 is called the Bid-Ask Spread.

Thousands of such trades every day generate revenue for market makers.

Rather than predicting market direction, most market makers earn consistent profits by facilitating transactions.

Real Trading Example

Suppose a company invests ₹5,00,000.

Expected cash inflows:

Year	Cash Flow
1	₹1,50,000
2	₹1,80,000
3	₹2,00,000
4	₹2,20,000

The objective is to find the discount rate where the total present value of these cash flows equals ₹5,00,000.

That percentage is the Internal Rate of Return.

Internal Rate of Return Example

Let’s take a practical example.

A trader wants to build an automated trading system.

Investment:

₹2,00,000

Expected annual profits:

Year 1 → ₹60,000

Year 2 → ₹70,000

Year 3 → ₹80,000

Year 4 → ₹90,000

Year 5 → ₹1,00,000

Using Excel’s IRR Function, the estimated IRR may come around 22–24%.

If the trader’s required return (also known as the hurdle rate) is only 15%, the investment appears financially attractive.

This is how professionals perform investment return analysis before committing capital.

Internal Rate of Return Example in Excel

Excel makes IRR calculations extremely easy.

Formula:

=IRR(B2:B7)

Where B2:B7 contains:

Initial investment (negative value)
Future cash inflows

Example:

Cash Flow

-500000

150000

180000

200000

220000

Excel automatically estimates the IRR.

For uneven cash flows occurring on different dates, use:

=XIRR()

This provides much more accurate results.

IRR Calculator

Many investors use an IRR calculator instead of manual calculations.

Common tools include:

Excel IRR Function
Excel XIRR Function
Financial calculators
Investment modeling software
Online IRR calculators

For professionals performing financial feasibility analysis, Excel remains the industry standard.

Internal Rate of Return Method in Capital Budgeting

The Internal Rate of Return Method is among the most widely used capital budgeting techniques.

Companies use IRR while deciding whether to:

Build new factories
Launch new products
Acquire businesses
Invest in technology
Purchase expensive machinery

Decision Rule:

IRR > Cost of Capital → Accept
IRR < Cost of Capital → Reject

This makes IRR one of the most important financial decision-making tools in corporate finance.

Net Present Value vs Internal Rate of Return

Many beginners confuse Net Present Value vs Internal Rate of Return.

Feature	NPV	IRR
Output	Amount	Percentage
Decision	Positive or Negative	Higher or Lower
Focus	Value Creation	Rate of Return
Best For	Large Projects	Investment Comparison

NPV Advantages

Measures actual wealth creation
Better for mutually exclusive projects
More reliable for large investments

IRR Advantages

Easy to understand
Percentage-based comparison
Preferred by investors

Most finance professionals use NPV and IRR together rather than choosing one over the other.

Internal Rate of Return vs ROI

ROI	IRR
Simple Return	Annualized Return
Ignores Time	Considers Time
Easy Calculation	Complex Calculation
Less Accurate	More Accurate

ROI is suitable for quick evaluations.

IRR is better for long-term investment planning.

Internal Rate of Return vs CAGR

Many stock market beginners ask:

“Should I use CAGR or IRR?”

CAGR measures growth between two values.

IRR measures multiple cash flows over time.

If investments involve SIPs, dividends, staggered withdrawals, or recurring investments, IRR provides a much more realistic picture.

XIRR vs IRR

Use IRR when cash flows occur annually.

Use XIRR when cash flows happen on irregular dates.

Mutual fund investors generally prefer XIRR because SIP investments occur every month.

MIRR vs IRR

Modified Internal Rate of Return (MIRR) improves traditional IRR by assuming reinvestment at the company’s cost of capital rather than at the IRR itself.

Many financial analysts consider MIRR more realistic for large-scale corporate investment analysis.

What is a Good IRR?

There is no universal answer.

Generally:

IRR	Interpretation
Below 8%	Weak
8–12%	Average
12–18%	Good
Above 20%	Excellent (depends on risk)

A “good” IRR depends on:

Industry
Risk
Inflation
Cost of capital
Market conditions

Advantages of Internal Rate of Return

✔ Considers time value of money

✔ Useful for comparing projects

✔ Percentage format is easy to understand

✔ Excellent for investment appraisal

✔ Helps in project profitability analysis

✔ Widely accepted in corporate finance

Limitations of IRR

Despite its popularity, IRR has limitations.

Assumes reinvestment at IRR
Multiple IRRs may exist
Not ideal for unconventional cash flows
Ignores project size
Should not replace NPV completely

Professional investors always combine IRR with discounted cash flow analysis, profitability index, and cash flow analysis before making investment decisions.

Real-Life Applications

Assume ABC Ltd.

Bid Price: ₹150

Ask Price: ₹150.20

You buy 100 shares.

You purchase at ₹150.20.

Another trader immediately sells at ₹150.

The market maker earns the spread while providing instant execution.

This tiny spread multiplied across millions of trades becomes a significant business.

Understanding Bid-Ask Spread

The bid-ask spread reflects market liquidity.

Tight Spread

Bid ₹500

Ask ₹500.05

Highly liquid stock.

Examples:

Reliance
TCS
Infosys

Wide Spread

Bid ₹50

Ask ₹52

Low liquidity.

Usually seen in:

SME stocks
Penny stocks
Newly listed companies

Professional traders often monitor spreads before entering positions because wider spreads increase trading costs.

Price Discovery

Price discovery is the process through which markets determine the fair value of a stock.

Market makers assist by continuously updating quotes based on:

Demand
Supply
Market news
Institutional orders
Trading volume
Order flow

Without this mechanism, prices would jump erratically.

Role of Market Makers in Stock Market

Market makers perform several essential functions:

1. Providing Liquidity

Liquidity ensures investors can buy or sell instantly.

Higher liquidity means:

Better execution
Lower slippage
Faster transactions

2. Maintaining Orderly Markets

During volatile sessions, market makers help stabilize trading by continuously offering buy and sell quotes.

3. Supporting Price Discovery

Quotes adjust every second based on order flow.

This enables fair market pricing.

4. Reducing Bid-Ask Spread

Highly active market makers compete with one another, often resulting in tighter spreads and lower trading costs.

Market Makers in India

In India, market making is particularly important for:

SME IPOs
SME-listed companies
Certain exchange-traded securities
Derivatives

Market makers in the Indian stock market operate under regulatory guidelines and exchange obligations designed to maintain liquidity. Their responsibilities are especially visible in SME listings, where trading volumes are naturally lower than in large-cap stocks.

Market Makers in SME IPOs

One of the biggest misconceptions among beginners is believing that every listed stock naturally attracts buyers and sellers.

That’s not always true.

Newly listed SME companies often experience lower trading activity.

To maintain liquidity, designated market makers continuously provide buy and sell quotes.

Without them:

Investors struggle to exit
Prices become highly volatile
Trading confidence declines

This is one reason why SME IPOs generally appoint market makers as part of the listing process.

Market Makers vs Brokers

Market Maker	Broker
Provides liquidity	Executes client orders
Quotes buy & sell prices	Finds best execution
Earns bid-ask spread	Earns brokerage
Trades own inventory	Doesn’t usually hold inventory

Many beginners confuse brokers with market makers.

A broker simply facilitates trades.

A market maker actively participates in trading.

Do Market Makers Manipulate Stock Prices?

This is one of the most searched questions online.

The short answer is:

Not in the way many social media videos claim.

Market makers react to order flow and liquidity conditions. Large institutional transactions can temporarily influence prices because executing massive orders requires liquidity.

Retail traders often mistake these normal liquidity movements for “manipulation.”

That said, every regulated market has surveillance systems designed to detect and prevent abusive practices such as spoofing, layering, or artificial price creation.

The better approach is to understand market microstructure rather than assuming every adverse move is intentional.

Trading Psychology: Why Beginners Blame Market Makers

A common emotional cycle among new traders looks like this:

Buy after a breakout.
Price reverses.
Stop-loss gets hit.
Market resumes the original trend.
Trader blames market makers.

In reality, many traders place stop-losses at obvious technical levels. When multiple orders cluster together, price may naturally move through those liquidity zones before continuing.

Professional traders focus on risk management instead of searching for someone to blame.

Benefits of Market Makers

Higher liquidity
Faster order execution
Better price discovery
Narrower spreads
Lower volatility in normal conditions
Improved market efficiency
Greater investor confidence

Disadvantages

Although market makers are essential, there are limitations:

Spreads can widen during extreme volatility.
Thinly traded securities may still experience price gaps.
Retail traders may misunderstand liquidity-driven price moves.
Low-volume stocks can remain difficult to trade despite market-making activity.

Expert Insight

One lesson experienced traders learn is that price does not move only because of chart patterns it also moves because of liquidity.

Understanding concepts like bid-ask spread, order flow, market depth, and liquidity zones provides a much clearer picture of why markets behave the way they do.

Instead of trying to “beat” market makers, learn how to interpret the information that liquidity leaves behind.

Learn Professional Trading

Liquidating education and seriousness about how institutions, liquidity and professional trading work really does matter.

One of the Best Stock Market Institute in India, Trendy Traders Academy has educated thousands of students through live trading sessions, hands-on learning, and mentorship programs. It provides beginner to advanced learning programs, flexible online/off-line classes and focuses on real market application.

Students also learn from Abhishek Jha, who has a hands-on trading strategy that emphasizes market structure, risk management and disciplined decision-making that he has honed in the years he has been trading in markets.

Trade with the masters, and you’ll be able to save time and avoid frequent trading mistakes—whether you’re new or experienced.

Conclusion

One of the most significant but least recognized groups in financial markets is the group of market makers. They facilitate the smooth execution of trades, reduce bid-ask spreads, enhance market liquidity, and enable investors to make more informed decisions, leading to increased confidence in trading.

But instead of seeing the market makers as competitors, successful traders understand how the liquidity, order flow and market depth affect price movement. This knowledge translates into improved trading, enhanced risk management, and more informed decision making.

When your aim is to acquire these business terms in an organized manner with actual market scenarios, the experience of the mentors can make a difference. Trendy Traders Academy aims to offer a complete trading journey for every trader aspiring to develop long-term trading expertise and discipline through thousands of trained learners, practical live sessions, and expert instruction from Abhishek Jha.