Would you expect firms in tight markets to reap higher profits, on average, than firms in loose market? Explain

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readerofbooks | College Teacher | (Level 2) Educator Emeritus

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This is a difficult question to answer, because you do not give too much information. Also it all depends on what firms you are speaking of. There are finance firms, trading firms, etc. With that said, it is probably best to start with some definitions.

Tight markets are when volume is high and trading is active. The spreads between bid and ask are also low. Loose markets are when there is little volume and for this reason, the markets can be volatile.

Based on these definitions, we would expect certain firms to do better in tight markets and other firms to do better in loose markets. Let me explain. If you have a day trading firm, they would do better with a loose market, because they make money on the volatility of the market. The up and down swings is what they are looking for. If you are dealing with a traditional firm that seeks out longterm investments, a stable market is probably better (tight market), especially if they hold companies that pay good dividends.

If you are dealing with a non-trading firm, tighter market conditions are better, because the large volume indicates that there is money and there are many investors.

In the end, it all depends on the company.

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