Financial Markets (Session Four)

Session Four

Market Mechanism:

Depth: Market depth is defined as the capability of the market to generate enough or extra orders without having an effect on the price of a security, as it can be defined in another way, it is measured also with the liquidity, the more liquid the markets are the more depth it has; moving security prices in large markets is really hard, because of the depth of the markets large orders must be taken in order to change prices slightly.

There are certain factors which affect market depth:

Tick Size

Prices movement restriction

Trading restriction

Allowable leverage

Market Transparency

But there is a very big role that takes place in the markets that we can‘t ignore, which is known by investors‘ rationality, or market psychology.

Markets in general are really built on speculations, forecasts and fears; if certain gossip spreads in markets average investors‘ would really panic which at the end leads them to take irrational acts, that could really affect the trend that is going into markets, but let‘s not forget the bigger influential which is known by attitude toward risk.

We all know a rational investor won‘t really take into consideration any spread of rumors into markets they will concentrate more risk; but the enigma starts when the amount of average investors‘ in markets gets bigger which would eventually affect the overall movement, obligating rational investors‘ to take different actions to wipe away any extra risk that can be added on them.