Soft Market: Defining Factors
What is the Soft Market?
A soft market is a market which has more potential sellers than buyers. The term can be used to describe an entire industry such as the retail market, a specific asset such as a commodity like coffee, or a particular currency like the dollar. A soft market is often referred to as a buyer’s market as in this situation, the purchasers hold much of the power in negotiations.
The main defining factor of a soft market is a sharp drop in prices as buyers become scarce and sellers find competition to find buyers. Prices will fall quickly as supply outstrips demand and prices are driven down. It is this surplus of supply that drives the markets down as sellers may be ready to make substantial concessions to quickly rubber stamp a deal.
Soft markets tend to occur in the housing market every now and again. If this situation arises, the housing market is tarnished by an excess of houses that stay on the market without being sold. What then happens is that instead of taking their houses off the market until the market has recovered to a degree, owners tend to panic and start dropping their prices. This then results in a further drop in house prices. The buyers also contribute to the decline as they see the panic selling and push the sellers to reduce their prices even more.
As soft markets are really a buyer’s market, the buyer gets to decide on the terms of any deal and consequently they are in the driving seat with sellers that have no choice but to sell. Sellers who have adequate capital can ride out a soft market as they are not forced into selling their assets and find the market nothing more than a little problematic with a negative blip in their investment strategy. It is worth remembering that the nature of a market is cyclical, hence a soft market appears periodically. Traders who have no experience of market trends may, therefore, find themselves on the losing side of a soft market.
In a soft market volumes tend to increase quite sharply and the market becomes very liquid. Being in a buyer’s market usually means there are some really good bargains to be had and investors buy into the market cheaply for a long term return on their investment. However, this strategy could be dangerous if the markets don’t recover quickly and the market softens even more.
The worst thing you can do as a holder of an asset in a soft market is to panic and abandon your investments. You should hold onto them if at all possible. Off-loading an investment can result in a loss which might have otherwise been avoided. Traders with Banc De Binary will find that the most sensible way of surviving a soft market is to diversify investments and currency trading to ensure that if an asset is experiencing a soft market, profits can always be maximised.