What is a Choice Market?

by Investing School on June 20, 2011

Every once in a while the lucky investor will run into a condition called a choice market. This is a market in which a specific financial instrument will experience no spread between the “ask” and the bid. In other words, the instrument in question can be purchased for the same price at which it can be sold.

The market in which this situation is most common is foreign exchange. Some currency pairs are traded with a spread of only a fraction of a percent between their values. Profit is made on bulk purchases in this case. These spreads are described in basis points.

A basis point is equal to 0.01%. It is used to indicate a change in interest rates, the yield of a fixed-income and security equity indexes. To put this in more concrete terms imagine an investment where the anticipated yield grows from 4% to 4.5%. The yield has therefore increased by 50 basis points.

In recent years Forex trading has gained in popularity. Currency trading offers a great deal more flexibility than more traditional stocks and bonds. It is the liquidity of the market that makes it so appealing. There are always currencies in which you can trade. Trading takes place around the clock and there is a great deal of leverage available to traders.

Of course those same conditions mean that the investor must be disciplined and sharp. The same leverage which allows an investor to borrow to complete a trade means that if a trade goes badly, they will end up owing a great deal of money.

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