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In Finance, what is a Choice Market?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A choice market is a situation where the current ask price for a particular stock is the same as the current bid price. This type of situation is identified as choice because the potential for making trades with the security is very high. While a somewhat rare occurrence, a choice market situation can occur in just about every type of market, although the phenomenon tends to be more common with the FOREX or foreign exchange market.

There are a couple of factors that must be present in order for a choice market to develop. First, there must be a high degree of liquidity present in the market. Along with this liquidity, the number of intermediaries that are currently in evidence must be somewhat lower than usual. The combination of these factors helps to narrow the spread between the ask and bid prices, sometimes to the point that the bid-ask spread reaches a point of zero.

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Of all the investment markets currently functioning today, the foreign exchange market is the most likely place to see activity that either demonstrates a true choice market situation, or is at least a near choice market. Bid and ask rates between currencies may be so close that the spread or difference may be no more than a tenth of a percent. For short periods, it is even possible for the spread to reach zero. When a true choice market situation occurs within the FOREX market, it is likely to occur quickly, remain for only a very short time, and then disappear as suddenly as it appeared. This is partly due to the rapid rate of change that takes place with currency trades in general.

The decision to take advantage of a choice market situation often depends on how quickly the trade can be conducted, and what type of return can be projected over both the short-term and the long-term. As with any type of investment strategy, the idea is engage in trading that will have a positive impact on the overall value of the portfolio. Assuming that a stock that currently has no spread is anticipated to increase in value within an acceptable time frame, moving to purchase the shares is a good idea. For this reason, the trade should not be based on the current choice market situation alone, but also on the past performance of the security, the current par value, and the prospects for future returns.

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