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Thin markets are any type of market where the current level of trading is unusually low. When a thin market situation exists, the market experiences a wider difference between the bid and ask quotes that take place. Because there is little buying or selling taking place, the thin market is considered to possess a low liquidity.
A thin market shares a couple of characteristics with the phenomenon known as a narrow market. Both types of market conditions demonstrate low trading volume and are considered to be temporary states. However, the narrow market usually involves a great deal of fluctuation on the prices of the assets that are being traded while the thin market tends to be somewhat more stagnant. Nevertheless, it is not unusual for some investors to use the two terms interchangeably.
Any type of market can experience this phenomenon. Economic conditions that are related to political events or natural disasters can easily slow down a thriving market to the point that very little trading is taking place. This can happen with stocks, bonds, futures and even with currency trading. No market is exempt from becoming a thin market.
Fortunately, a thin market normally begins to exhibit signs of recovery in a relatively short period of time, once the triggers for the activity have subsided. When this happens, the thin market will become a liquid market quickly, much to the delight of traders. Generally, the market will peak and then settle back into a consistent but profitable state.
Many investors choose to hold on to their current portfolio during a thin market. The idea is to wait out the temporary state of low liquidity and remain poised to resume activity when economic indicators point toward conditions that are conducive for market recovery. At that point, investors can begin to look into releasing some assets for trade, or to begin acquiring some of the lower priced offerings on the market before they begin to rise in price.