What is a 'market maker'?

A market maker is a firm that quotes both buy and sell prices for securities, facilitating liquidity in the market by ensuring there is always a participant available to buy or sell securities. This function is crucial because it helps to maintain an orderly market by providing consistent pricing and making it easier for investors to execute trades. Market makers earn profits through the spread, which is the difference between the buy (bid) and sell (ask) prices they quote.

In contrast, the other options describe different roles in finance that do not pertain specifically to market making. For example, providing investment advice is a role typically fulfilled by financial advisors or brokers rather than market makers. The act of buying and holding securities long-term refers to an investment strategy and does not relate to the market-making function. Similarly, a banking institution that loans money to investors is primarily involved in lending and does not serve the liquidity functions that market makers perform in securities trading.