A thin market is the period of time when there is a low number of buyers and sellers on any financial exchange. This situation can happen in a single stock, a whole sector, or even the entire market. During this situation, there is a big probability for prices to be volatile.
Some investors or traders usually call this market situation as a narrow market.
Understanding How it Works
During a thin market, there is low liquidity accompanied by high price volatility. There is a sudden imbalance in supply and demand, significantly affecting the price of assets.
Worse of all, during that situation potential buyers and sellers, may still have difficulties to make transaction due to few bids and asks are being quoted. Even if the overall market is low, yet the individual transactions have the tendency to be large.
Consequently, there are greater price movements. Besides, there are also wider gaps in spreads between the bid and ask prices. That wide gap comes as many traders want to take profit from the low number of investors participate within the market.
The opposite of thin market is a liquid market. In liquid market there is a high number of buyers and sellers, relatively low price volatility and also strong liquidity.
The Effects on Your Trades
In the early 1990s, when the market information became publicly available for the first time, there is a clear impact from institutional investors in both the thin market and market prices in general. Since then, the transactions from large institutions make more than 70% of the daily trading volume on the New York Stock Exchange (NYSE).
That way, investors need to consider that large institution orders in their trading strategies. Most of the time, large traders break up their orders to smaller blocks. After that, they place those blocks into a series of transactions over time.
More than half of their trades usually take more than four days to complete. Once they push through all of their trades at once, then the prices they pay to buy or receive to sell stocks will affect trades.
