Flashcards in Basic Economics III Deck (18)
- A market where information is not quickly disclosed to all participants in it and where the matching of buyers and sellers isn't immediate.
This can also happen when there is price corruption, improperly disseminated information and other market inefficiencies.
(Explains why it is possible for there to be an inefficient market)
A market with:
- many bid and ask offers
- low spreads
- low volatility.
Trading in a liquid market
In a liquid market:
- it is easy to execute a trade quickly and at a desirable price because:
- there are numerous buyers and sellers.
In a liquid market, changes in supply have a relatively small impact on price.
What is the opposite of a liquid market?
(aka "narrow market")
(opposite of a liquid market)
- a market with a low number of buyers and sellers.
- since few transactions take place in a thin market, prices are often more volatile and assets are less liquid.
- the low number of bids and asks will also typically result in a larger spread between the two quotes.
How does supply and demand affect a thin market?
If supply or demand changes abruptly, resulting in more buyers than sellers or vice versa, there will be:
- a material impact on prices.
A stock exchange with fewer price and volume swings.
- large numbers of shares can be bought and sold without drastically affecting the price.
A theory which asserts that:
- The market prices of common stocks and securities are not always accurately priced.
This theory states that:
- market forces sometimes drive asset prices above or below their true value.
- this is supported in the instance of illogical crashes and spike.
- so, in an inefficient market, some securities will be overpriced and others will be underpriced, which means some investors can:
- make excess returns
- can lose more than warranted by their level of risk exposure.
Glass Steagall Act
Act that separated investment banks from commercial banks.
- created in 1933 by Congress
- after the act was created banks could only specialize in commercial or investment banking.
- created because it was believed that the depression was partially caused by commercial banks using customers money to make risky investments in the stock market.
- unsound loans were issued to companies banks had invested in and customers were encouraged to invest in those same businesses.
- banks became greedy and objectives became blurred.
(aka "spin out")
- A type of corporate restructuring.
- occurs when a company breaks off part of itself to form a new company.
- the new company brings with it some of the parent company's assets.
- spin offs can occur for many reasons (such as marketing a new product under a different company name).
What does it mean to be "in the red"?
Operating in debt or in a state of insolvency.
(Opposite of "in the black")
What does it mean to be "in the black"?
Operating at a profit or being out of debt.
(Opposite of "in the red")
refers to the extent to which a market, such as:
- a country's stock market
- a city's real estate market
allows assets to be bought and sold at stable prices.
Give some examples of market liquidity.
- the market for refrigerators in exchange for rare books is so illiquid, that, it doesn't really exist.
- the stock market, on the other hand, is characterized by higher market liquidity.
A market condition characterized by:
- a shortage of goods available for sale.
In a seller's market, the seller has the advantage because product is scarce (they can jack up the price and people will still buy)
A situation where supply exceeds demand.
- this gives purchasers an advantage over sellers in price negotiations.
(there is an excess of product and no one is buying, so the seller's have to cut prices)
Give an example of a seller's market
The real estate market during the housing bubble of the mid-2000's.
- property was in high demand
- because there were so many buyers, homes would sell even if they were overpriced or in bad condition.
- homes received multiple offers (which bid up the price)
What happened as a result of the housing bubble?
The housing market crash created:
- a buyer's market
- seller's had to work harder to generate interest in their properties
- buyers expected homes to be in excellent condition or priced at a discount