Characteristics of a Good Market
Generally, investors have a variety of investment solutions to choose from. Some of them include stocks, bonds, US treasuries, foreign exchange and many others.
However, regardless of which one you have selected the general condition of the market matters most regarding the success of the investments you will make. This article aims to present the basic characteristics that a favorable market should possess.
The basics characteristics that a beneficial market should possess are:
- Low transaction costs
Liquidity refers to the state of the market which best explains the easiness of entering and exiting the market. The process of executing trades involves:
- Opening of a position
- Closing of the same position
Liquidity is connected with volume. The latter represents the number of trades that are executed. So, liquidity describes the easiness with which investors can enter and exit the positions they have established.
If the market is liquid enough, then traders can execute large number of trades without any effect on the prices of the investments they make. Thus, markets can be qualified as beneficial to investors if they manage to offer them the possibility of making a large number of trades without any effect on the prices of stocks.
In contrast, markets that lack liquidity will result in delays regarding the execution of trades. Additionally, the market order fills will result in different prices than the initially set ones at the time the order was placed.
What is more, illiquid markets possess barriers to exiting the market when needed, which may result in higher cost of trades.
Low Transaction Costs
Another factor that may be directly reflected on the liquidity of the market is transaction cost. The latter may have a negative effect on the profits you have during times of winning stocks.
On the other hand, if you are incurring losses, transaction costs may deteriorate the condition.
So, low transaction costs are a major trait of good markets. Active traders, in particular, look for markets that present low transaction costs since they execute numerous trades every day. Transaction costs may be classified as:
- Explicit costs – e.g. commission fees
- Implicit costs – these costs may have hidden effects to the inexperienced investor.
Faulty executions tend to significantly increase transaction costs. This is observed in the case of having an artificially inflated actual price which greatly differs from the price at which the market clears the investment.
Degree of Transparency
In today’s information age, investors have access to myriads of information through many sources. Thus, the transparency of the market is of high importance. It represents the ability of investors to easily get in touch with data concerning trading processes that take place on the market.
Information is one of the best tools that you can have, thus you should try to stay informed as much as possible. The lack of knowledge may be directly reflected on your investment decisions.
When you have the necessary knowledge you will be better able to construct your investment strategies that will eventually lead you to the achievement of your financial goals.
Additionally, market transparency will enable you to stay focused and apply the necessary discipline, which are a prerequisite for successful investments in the dynamic stock market.
Furthermore, market transparency enables investors to more accurately determine their level of risk tolerance, which is crucial in selecting investments that best fit to the investor’s portfolio.
In order to qualify a market as being transparent, it should provide investors wit the possibility of executing trades by live prices. If this is not provided, investors will be ill at ease and delays in the fill of the orders may be experienced, which in turn may result in discrepancy between the fill price and the market rate.
The economy is characterized as following a particular pattern of ups and downs. If the market lacks this trending, investors may find it difficult to synchronize their trades which may lead to losses.
Additionally, the application of technical analysis requires such cycles in order for the price movement to be effectively used. Many analysts use past performances as basis for predicting future trends.