EDU Articles
Popular articles
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 is market equilibrium?
Market Equilibrium occurs when fluctuations between supply and demand balance out, keeping prices relatively stable. This trend appears relatively horizontal or sideways when charted. Both price equilibrium and quantity equilibrium should meet at the same point where the supply and demand curves meet on a chart. According to the Law of Supply, with all factors being equal, if the price of a good or service increases, the supply of that good or service will increase. If demand doesn't meet it, the price of that good or service must come down; this increases demand but might cause a shortage in supply, which might drive prices back up, and so on. Continue reading...
What is the Price to Book Ratio (P/B Ratio)?
The price to book ratio compares a company’s current stock market price to its book value (which is generally speaking a company’s net assets). To calculate, an analyst need only divide a company’s latest market price by it book value, which is calculated by taking ‘Total Assets minus Intangible Assets and Liabilities.’ The P/B ratio gives some idea of what premium an investor is paying if the company went bankrupt immediately. Continue reading...
What is a bull market?
Bull markets are defined as periods of sustained investor confidence and market growth, as prices trend higher and indexes rise over time. These stretches are typically tied to economic growth and strength. When investor sentiment is “bullish,” investors are generally willing to take more risk. These extended periods of growth typically last for months but can last for years. There are more technical definitions of a bull market, depending on which index, commodity, and other asset is being considered. As a general rule, however, bull markets tend to see stocks rise by 20% in response to a 20% decline, before eventually declining by 20% again to signal the end of the bull run. The longest bull run in S&P 500 history took place from March 2009 to March 2020, experiencing well over 300% growth over that time. Continue reading...
What is the Equity Risk Premium?
The Equity Risk Premium (aka, Equity Premium) is the expected return of the stock market over the risk-free rate (U.S. Treasuries). This number basically refers to the amount an investor should expect in exchange for accepting the risk inherent in the stock market. The size of the equity risk premium varies depending on the amount of risk of a portfolio, the market, or a specific holding investment, against the risk-free rate. 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 a pivot point?
A pivot point is a technical indicator used by traders to determine overall market trends over various windows. This indicator used to be solely the average of the high, low, and closing prices of the previous day, but modern trading utilizes different versions of this concept for day trading and short term analysis. In many cases, pivot points are now quick-reference tools used in intra-day trading that give the trader benchmarks and perspective as short-term price movements happen. How the trader calculates the pivot point depends on whether the point is going to be part of a chart with a scope of several minutes or the present day or present week. 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 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 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 defined as a market correction?
Sometimes a stock or index will reflect prices that have become inflated or overvalued in the short-term as a result of bullish conditions. In some cases, due to shift in sentiment or a negative news story in the headlines, stocks may retreat suddenly and without notice. A market correction is a sharp, sudden decline in stock prices, where they fall in value by around 10% - 20% over a short period, usually no longer than 6 months. Corrections are frequent occurrences (typically an average of once a year) and are a normal and healthy part of equity investing. 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 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 “efficient market hypothesis”?
The Efficient Market Hypothesis (EMH) states that it is impossible to beat the market consistently over time, since all available information is priced efficiently into stock prices. But what the EMH misses is the impact that sentiment can have on price discrepancies in the short-term. Emotions can lead to gross mis-valuations (as we saw with the tech bubble in 2000), and market corrections can see stocks selling off dramatically for no fundamental reason. 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 disequilibrium?
Market Disequilibrium occurs when market and external forces combine to unbalance a market, creating inefficiency in the market in the process. A disequilibrium produces what’s called a “deadweight loss,” “welfare loss,” “excess burden,” or “allocative inefficiency.” As described by efficient market theory, the price fluctuations we see in market behavior are the market trying to find its truly efficient price and quantity – the theoretical point of equilibrium. Investors attempt to locate it using moving averages and other means of technical analysis. 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...
What does Arbitrage Mean?
Arbitrage is the practice of buying a security/product in one market and selling it in another, in an effort to capitalize on price difference. Arbitrage can take many forms in trading: buying a security in one market and selling it in another for a better price (market arbitrage); borrowing money in one currency at a lower interest rate in order to pay off debt in another currency with a higher interest rate (currency arbitrage); buying and selling the same security on different exchanges or between spot prices of a security and its future contract; and so on. Continue reading...