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What is a Thin Market?
A thin market can also be called a lean market or a narrow market. It is a market situation whereby the number of buyers and sellers are comparatively low. Due to a small number of sellers and purchasers, transactions in a thin market are also low. As a result of small participants or traders in a thin market, the prices are also moderate and volatile. That is, prices cannot be easily predicted because of few assets. The small number of buyers and sellers in a thin market results in low transaction volume, low bid volumes as well as less liquid in the market.
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How Does a Thin Market Work?
Unlike the liquid market which is characterized by a high rate of sellers and purchasers, high liquidity and lower price volatility, the thin market has relatively low buyers and sellers. The major features of a thin market are high price vulnerability and low liquidity. There is also a low number of bids and asks in this market. Due to the number of buyers and sellers that partake in a thin market, supply and demand tend to change unpredictably because transaction in this market might not suit potential buyers and sellers. Trading in a thin market often require price concessions from traders in the market, these price concessions and other acts that traders engage in tend to have noticeable impacts on the market prices. Market thinness lacks liquidity which refers to ease in trading security in a market, hence, thinness of market give rise to illiquidity. Market data however reveal that institutional investors and the trading strategies they exhibit have a significant impact on thin market prices. For instance, when the rate of buying or selling offers is small as seen in a thin market, the positions of investors trading in the market are large relative to market size.