We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is an Active Market?

John Lister
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

"Active market" is a loosely-defined phrase referring to a market with a notably high level of trading. This type of market has some distinct characteristics. This in turn brings specific risks and opportunities to investors.

There are two different meaning for the phrase "active market." One is for the market in a particular stock or other financial product. The other is for an entire market such as the US stock market.

An active market will normally be fairly liquid. This is a measure of how easy it is to buy or sell a product without causing a change in its price. As a general rule, larger investors prefer a liquid market as it is easier to quickly sell off assets if, for example, a customer wants to cash in their investment.

In a market which is not particularly liquid, suddenly selling assets can cause the market price to fall, which may limit or even undo the benefits of selling at that particular moment. Similarly, trying to buy a stock in an illiquid market can drive the price up beyond that which the buyer had counted on paying. The presence of an active market is particularly welcome for large institutional investors, as they deal in greater volumes and thus present a greater risk of their transactions distorting the price.

Another notable characteristic of an active market is a lower bid/ask spread. This is the difference between the going rates for buying and selling a particular commodity, stock or other product. The spread exists because somebody buying a stock takes on the risk that they will not be able to sell it the moment they want to. The more active the market, the higher the chance that they won't have to wait so long to find a buyer. The spread is effectively the price the person who want to buy or sell the stock has to pay to ensure they get an immediate deal.

The phrase should not be confused with active market management or investment. This is a strategy in which an investor or fund manager specifically sets out to pick individual stocks or other financial products which they believe will perform disproportionately well. This is distinct from passive market management or investment, which aims to pick a representative range of stocks which performs largely in line with the market as a whole, thus theoretically minimizing both overall risk and the potential for spectacular gains or losses.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.
Discussion Comments
By snickerish — On Sep 09, 2011

@runner101 - I am not sure that I have heard of something in particular causing an active market, but as far as individual company's shares being active, I have heard of it becoming active following rumors of their profit and loss statements or following their actual quarterly report on profits and losses.

By runner101 — On Sep 08, 2011

I have heard that it is an active market following large market research reports such as government reports on the job market or certain sectors of the job market. For example, if the job market shows high unemployment with little outlook for an upswing in jobs in the following months, people may buy or sell based on the overall job market or a specific sector mentioned in the job market analysis.

For example, if a certain sector saw large job growth, then that might make someone look to buy the stock.

What are some other reasons people have heard of possibly causing an active market?

By andee — On Sep 07, 2011

My trades are usually in small enough lots that it doesn't matter too much how active the market is for them to get filled.

I can see how large companies or fund managers really need an active market to actively trade. Today's market can be quite volatile and making sure there is enough liquidity for large trades would be essential.

I have had situations when a stock is falling quickly and my trade didn't get filled as close to the price as I wanted it to. In an active market that was more balanced, this doesn't happen as often.

I also try to keep a close eye on how close the bid and ask price are. This can often give you a good indication of how much that particular stock might move throughout the day.

By julies — On Sep 07, 2011

I always prefer trading in an active market - especially if I have some low volume stocks that I am trying to buy or sell.

Most of the time my trades have enough volume and liquidity that I don't need to worry about it, but I think an active market is always much more healthy.

This means there is a lot of active trading that is happening and you shouldn't need to worry about your trades being filled.

John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.