Often referred to as a buyer’s market, the depressed market is a market situation in which there are a substantial number of sellers while the current number of buyers is considerably less. As a result, this type of market carries a great deal of supply, but with relatively little demand. This allows the active buyers to enjoy lower prices as long as the market remains depressed.
Depressed market conditions are usually a short-lived phenomenon. During this window of opportunity, savvy buyers can often look around and identify investments that are likely to generate a significant amount of return once the depression of the market begins to fade. In the interim, buyers will take steps to identify the best options, run the projections and quietly purchase the investments with the intention of holding on to them as they begin their upward swing. If the projections are correct, the buyer will hold on to the investments until just before they are expected to level out and possibly begin to decrease in value again.
Sellers in depressed markets face an uphill battle to interest the relatively small bank of buyers in their investment offerings. Because there is so little demand in the market, the sellers will often provide discounts and otherwise lower prices as a way to entice buyers to purchase the available shares. Even with reductions in unit price or other incentives, it is not always possible to make the sale, especially if the buyer does not believe the investment will appreciate within a reasonable period of time.
A depressed market may come about due to several factors. Political situations where there is uncertainty of how an incoming government will function may cause buyers to remain relatively inactive for a period of time. Economic situations such as a depression can cause investors to sit on their current portfolio without adding any items to it until there is some general improvement in the economy.
Fortunately, a depressed market tends to be a temporary situation. When the factors that led to the disparity between buyers and sellers begins to dissipate, the depressed market begins to recover somewhat and demand begins to rise. At that point, sellers are able to stimulate a rise in price by offering fewer discounts and slowly increasing the unit price.