What is an Emerging Market?

Malcolm Tatum

Emerging markets are the markets in nations that are beginning to develop in size and liquidity to the point that international investors are beginning to notice and participate in those markets. One of the benefits of this type of market is the fact that competition among investors is still somewhat low, making it possible to get in on the ground floor of what ultimately are very lucrative investment opportunities. At the same time, the degree of risk with an emerging market is somewhat more pronounced, since the investor has little to no historical data to use in the evaluation of a specific opportunity.

A country that holds promise for economic growth, like India, is called an emerging market economy.
A country that holds promise for economic growth, like India, is called an emerging market economy.

The term itself was first coined during the 1980s and was generally used to replace the older reference of a less economically developed country or LEDC. Identifying the economy in a given nation as an emerging market is considered to be more accurate, in that the market in question is recognized to be generally in a period of expansion, while also allowing for the possibility of minor setbacks to occur from time to time. There is some difference of opinion regarding when a given economy should be identified as an emerging market, although many analysts determine this status based on how those markets compare with the economies found in nations such as Japan, the western sector of Europe, or the United States.

Investing in an emerging market can prove to be quite profitable for investors. This is particularly true if there is evidence that the market will continue to grow with relatively few setbacks over the next several years. Investors who are able to identify this type of market early on are much more likely to acquire investments at extremely competitive prices, often better than similar investments in more developed nations. Assuming that the projection of performance is accurate, it is possible to earn a considerable amount of return from this type of activity.

Choosing to invest in an emerging market does present some degree of risk. Unlike investment opportunities in more developed nations, there is not as much historical data available to help investors assess how a given investment responds to specific shifts in the economy and the marketplace. Since many investors utilize this history when evaluating different investments, this means considering options in the emerging market must rely more heavily on other factors, including comparing similar options in other marketplaces. In order to offset at least some of the risk and attract investors, additional incentives are often extended by the issuers of those investment opportunities. Should the investor determine that the potential return is sufficient to take on the level of risk involved, he or she is more likely to acquire the investment and monitor its progress for indications that the asset will indeed appreciate over time.

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