What is a Tight Market?

Malcolm Tatum

When it comes to finance, tight markets are situations where a very narrow spread exists between the bid and the ask. A tight market may refer to the current status of a particular security or the state of a market in general. The reference to the market being "tight" has to do with the fact that the small spread between the bid and ask has resulted in a narrow range of price for the security.

Businessman with a briefcase
Businessman with a briefcase

It is important to note that a tight market is not a bad thing. Part of what makes the trading of the securities so close when it comes to the spread is that there is a lot of trading taking place. Thus, a tight market is usually a very active market. This is different from a thin market, where the trading is sporadic and not very active at all.

It is possible for a savvy investor to do quite well in a tight market. Careful attention to the current condition of the security market in general, along with detailed examination of the history and potential for particular securities, can make it possible to identify some great opportunities. The high volume of trading does increase the volatility to some degree, but even that factor can work to the advantage of the investor, if the right choices are made.

A tight market can be created by all sorts of factors. Stocks issued by companies that are riding high on current popular fads can become very desirable and lead to a tight market. Economic downturns in other areas may raise the demand for securities issued by companies in other sectors of the market. Even political situations or natural disasters can sometimes be the motivating factor for creating a tight market for a short period of time.

While experienced investors usually know how to make the most of a tight market, investors who are just starting out will want to consult a broker before leaping into trades. Once the investor has some experience dealing with casting projections and evaluating conditions, there is a good chance he will become proficient in reading a tight market and learning how to utilize the phenomenon to his best advantage.

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