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What is a Market Maker?
A market maker is a broker-dealer firm or a registered individual that will hold a certain number of shares of a security in order to facilitate trading. There could be as many as 50 market makers for one particular security, and they compete for customer order flows by displaying buy and sell quotations for a guaranteed number of shares. The market maker spread refers to the difference between the amount a market maker is willing to pay for a security and the amount that the other party is willing to sell it. Continue reading...
What is a market-maker spread?
The difference between the Bid and Ask prices on a stock or other security are known as the Spread. Designated market makers are traders whose job it is to make a market for securities, by offering to buy or sell shares, and thus creating liquidity, often at the same time. Their money is made on the spread. In highly liquid markets, the spread will shrink. So if everyone is buying and selling the same stock one day, there may be virtually no spread between the Bid and the Ask price, and this is seen as efficient. Continue reading...
What Does Mark to Market (MTM) Mean?
Mark to Market (MTM) is an accounting method meant to price an asset by its most recent market price. An example would be mutual funds, whose “NAV” price is a mark to market price of how much the mutual fund closed for at the end of a trading session. The mark to market accounting method has some pros and cons. On the pro side, if an asset is very liquid, then MTM will provide an accurate reflection of its current value. Continue reading...
What is market research?
Market research is the process of evaluating a possible opportunity for entering into a market with a new product or company, or for evaluating the effectiveness of a product or company in a market that they are already invested in. Market research can also be important for decisions regarding mergers and acquisitions. It may involve surveys and market study groups. Sometimes a company will conduct its own market research, but often third-party companies are hired for the task. These companies may specialize in sampling and surveying methods for consumer groups, and/or statistical analysis of a business model or product’s chance of success in a given market. Companies may look to such analysts if they are considering a merger or acquisition, or of launching a new product. Continue reading...
What is market efficiency?
Market efficiency describes the degree to which relevant information is integrated into the price of a security. With the prevalence of information technology today, markets are considered highly efficient; most investors have access to the same information with prices and industry news, updated instantaneously. The Efficient Market Hypothesis stems from this idea. Efficient markets are said to have all relevant information priced-in to the securities almost immediately. High trading volume also makes a market more efficient, as there is a high degree of liquidity for buyers and sellers, and the spread between bid and ask prices narrows. Continue reading...
What is a market-on-open order?
Traders can enter time-specific trade orders in the form of opening or closing orders, which are only to be executed as close to the opening or closing price as possible. Market-on-open orders are looking to buy or sell immediately after the market opens, at the opening price. Market-on-open orders are instructions for a broker or floor trader (even though we don’t see those much anymore these days) to buy or sell shares at opening price of the stock being traded. Continue reading...
What is market saturation?
Market Saturation is the point at which there are few consumers that are still interested in buying a product because those who were ever likely to already have done so. Saturation can be said to exist for all similar products in a market. This may call for different strategies which could keep a company going. One is that products can be made to wear out after a certain amount of time and need replacement. Another is that the business can shift its focus to subscription or service-based income. Continue reading...
What is market share?
Market share is the percentage of the total amount of similar products sold in a marketplace that are constituted by a particular product or the products of a particular company. This sometimes used synonymously with the term Market Penetration. Most industries have many competitors offering essentially the same services and products; in fact that is a sign of a healthy capitalistic marketplace. The market share of a company is the proportion of the total sales in that industry that belong to their company. Continue reading...
What is dollar cost averaging?
Dollar cost averaging (DCA) is a method of hedging against the risk of investing a lump sum at high market prices. With DCA, the investor deploys money at set intervals, hoping to get the best average price per share. If you use the same amount of money to buy shares at set intervals, you will acquire more shares when the market is down, and fewer shares when the market is up, so theoretically you would have acquired more of the advantageously-priced shares overall and will be in a better position in the long run. Continue reading...
What is market exposure?
Market exposure is the degree to which an investor is participating in the risks and returns of the market as a whole or a particular sector. Exposure can have a positive or negative connotation, but, as they say, “nothing ventured, nothing gained.” Market exposure allows an investor to participate in the potential upside of the market, but can also subject the investor to the inherent risks. Some people save money religiously but are not likely to retire the way they want to because they aren’t willing to let their money be risked in the market. Continue reading...
Are the markets efficient?
The concept of an efficient market is more applicable today than it was when it was conceived, a truly efficient market is nearly impossible. The Efficient Market Hypothesis states that random new information will affect the value of securities, and that new information disseminates so quickly among rational investors that it is futile to try to beat the “market portfolio.” Thirty years ago, this was more of a theory than an observable phenomenon, and plenty of inefficiencies in the dissemination of information and the pricing of securities could be pointed out. Continue reading...
What is Total Return?
Total Return is the measure of all appreciation and interest as well as dividends and other distributions from an investment. Often computations of return will only consider appreciation, and it can be an easy mistake to make when looking at performance data at times. When a stock pays significant and consistent dividends, it needs to be factored in to the computation of total return. This adds a significant compounding effect to the investment’s overall performance, but if you just looked at the sheets that said it had a 4% return and a 2% dividend yield, you would be missing the most important part. Total return can be calculated for different kinds of investments or an entire portfolio, and is often done on an annual basis once all distributions have been made. Continue reading...
What is Return on Sales?
Also called net operating margin, return on sales can indicate how well a company makes use of its sales revenue. By dividing Operating Profit by Net Sales, we can arrive at the Return on Sales. Essentially what we’ve done is broken down profits on a per sales basis. We can see what percentage of sales ends up as profit, or, on the other side of the coin, how much profit is generated per unit of sales. This can be useful for a comparison of companies of different sizes, because it excludes their assets, capital structures, taxes, and interest. Continue reading...
What is market risk?
Market risk is the chance that an investment will not maintain its value when it is dependent on the many factors that influence the health of the economy and the stock market. Investors must be aware that investing money in a stock or mutual fund is to tie the fate of that money to the fate of the company or companies that they have invested in. The other side of the coin, of course, is the potential for gains. The potential gains of an investment are the premium that is paid to an investor in exchange for allowing a company or mutual fund to take risks with the investor’s money. Continue reading...
What is market psychology?
Market psychology is the overarching sentiment of investors toward the stock market, and also their tendency as a group to pile-on in certain situations whether or not it is rational behavior and to exhibit other idiosyncrasies. Market psychology usually comes into conflict with the efficient market hypothesis tenet that investors are rational. Behavioral finance and the study of market psychology has become a more relevant topic in the last 30 years or so since more main street investors are influencing prices in the market. If you have taken a psychology course, you will know that sometimes people behave in ways that are incongruent with what they believe or what is rational. Continue reading...
What Is Market Capitalization?
Market capitalization is a measure of a company’s size, in terms of the value of its total outstanding shares. Most readers have probably heard of large-cap, mid-cap, and small-cap stocks. These classifications are based on the market capitalization of a company, which is defined as the number of a company's outstanding shares multiplied by the price of one share. For example, if company ABC issued 1,000 shares and it is trading at $10/share, then the market capitalization of company ABC is 1,000 x 10 = $10,000. The largest company by market capitalization as of the time of this writing is Apple Inc. Its market capitalization exceeds $750 billion. Continue reading...
What is market disruption?
Market disruption is a term that describes the state of affairs when the status quo of the stock market or a particular industry’s market is destabilized. This could include the entry of what’s called a disruptive technology or new competitive company, or a natural disaster, or technical difficulties with the computer network that the exchanges use. It is also commonly used to refer to a panic or mania that makes the market disorderly and is stemmed through the use of circuit breakers. Continue reading...
What are Marketable Securities?
Marketable securities is a term referring to assets / securities that can be converted to cash easily, at least within a year. Examples of marketable securities are stocks, bonds, or CDs you might buy at the bank. What makes an asset a marketable security is its ability to be redeemed for cash quickly at a known market price. What is a Broker-Dealer? What is an Illiquid Security? Continue reading...
What is market neutral?
Market neutral is a term used to describe strategies of investing that are poised to benefit whether the market goes up or down, or even if it stays stagnant. Some professionally managed funds might take a market-neutral stance in their entirety, or investors might employ market-neutral strategies for specific parts of their portfolio. Market Neutral means that your position as an investor is neither bearish nor bullish, and you may be able to profit whether the market moves up or down, or even if it doesn’t move at all. Options traders, for instance, have a wide variety of market-neutral positions that they can take, since profiting may depend more on the presence of volatility rather than price movement in one direction or another. Continue reading...
What is market breadth?
Market Breadth is a descriptor that is used in several market indicators such as the daily breadth, the A/D Line, the McClellan Oscillator, and Arms Index. Breadth is the relative difference in the amount of advancing stocks and declining stocks. Daily breadth is simply computed by subtracting one from the other, or creating a ratio in which one is divided by the other. Daily breadth is closely related, even interchangeable, with the Advance/Decline ratio. It can also refer to the difference between New Highs and New Lows, or Net New Highs. Continue reading...