Definition of Narrow Market
By Dave Manuel
What is the definition of the term "narrow market"? What does the term "narrow market" mean?
A "narrow market" is a market that has very little liquidity and is subject to wild price swings.
For instance, let's say that there is a very thinly traded stock called XYZ, Inc. XYZ, Inc. trades on the pink sheets, and there are usually only a couple of trades per day. Thanks to the illiquidity, there is a large gap between the bid and ask.
Now, if you come along and want to buy a decent sized position in XYZ, Inc., you are going to cause the price of the stock to increase considerably due to the lack of liquidity in the offering. For instance, before you start buying the stock, it may have a bid of $4.50 and an ask of $5.15. Let's say that you want to buy 5,000 shares of the stock. By the time you are done, the price of the stock may be up to $7, all due to your buying.
Now, a stock like Microsoft (MSFT) is very liquid, and it is the exact opposite of a "narrow market". Due to its liquidity, there is a very, very small gap between the bid and ask, and you can buy an almost limitless number of shares without having a dramatic impact on the share price.
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