What are Frontier Markets?

Frontier markets are underdeveloped emerging markets in nations with economies lagging behind the industrialized world, but showing potential for future development. The concept of frontier markets was developed by the International Finance Corporation (IFC) in the 1990s to describe a specific subset within the larger group of emerging markets. People can engage in trade with these markets and several stock exchanges have frontier market indexes designed to track performance in these markets.

Emerging markets in general are economies in the process of developing rapidly and showing explosive potential for growth. Nations can encourage the development of emerging markets in a variety of ways, including heavy promotion designed to attract foreign trade and investment. Within the emerging markets around the world, small markets with poor liquidity and low market capitalization are considered frontier markets.

As a current investment, many frontier markets perform very poorly. They lag behind other markets on most indices of stock market performance and they can be volatile. However, in the long term, they have substantial potential. Investors may choose to get involved in a frontier market with the goal of reaping rewards in the future. Investment in these markets requires the ability to sit on investments in the long term, as people can take losses by attempting to liquidate investments in frontier markets before those markets have fully matured.

Also known as pre-emerging markets, frontier markets can be a risky investment. People who are interested in such markets usually diversify their investment risks to ensure access to liquidity when it is needed and to avoid losses caused by concentrating investments in limited sectors. When investing in frontier markets, people usually evaluate the markets and the political situations closely in order to make an informed decision about where investments could be most safely placed.

As of 2010, 30 to 40 markets were considered to be on the frontiers, depending on which index is followed. Some examples include Bangladesh, Lebanon, Mongolia, Nigeria, Argentina, Vietnam, and Slovenia. Several mutual funds designed around investment in frontier markets are available for investors interested in getting involved in them, and people can also invest independently. It is advisable to research thoroughly and to take advantage of information published in financial magazines and other financial publications to make the best possible investment decision. Even with careful research, it is possible to take a loss on investments in these markets and people should distribute their investments wisely.