Economic Market

There are several categories which divide and define Equity Markets. Markets can be divided by geographic region, and by economic market categories. There are typically two economic categories utilized by classifiers. The first is referred to as the “Developed Markets” and the second is named the “Emerging Markets”. The nations within each category are placed according to economic development.

Developed Nations

The developed markets consist of industrialized nations. These markets are strong, stable, older, and often have been established for almost or over a century. Examples of these nations include France, Germany, Japan, the United Kingdom, and the United States. They typically host thousands of large and mega-capitalization firms. They also host the largest share exchanges. Firms often have shares which trade on these exchanges and own other firms as subsidiaries within these countries. These markets are highly regulated, carefully tracked, and attract the majority of share listings and trades. These markets are also highly correlated or interconnected, since the largest corporations in the world target consumer markets in these nations. Economic slowdowns in these markets typically chain into other developed and emerging markets.

Emerging Markets

Emerging Markets are nations with economies that are young, weak, and relatively less established. These nations are not as developed as industrialized nations. Due to their lack of completed development, these nations are generally volatile. Emerging market risks are not limited only to these issues. They have all the typical risks of equity markets, but also suffer share liquidity, governmental default, and currency value risks. These risks stem from low overall development, which does not have the trading volume or financial stability of developed markets. They may also suffer from weak regulations, lowered analyst coverage, and slow flows of financial information. Due to the many risks and difficulties, it’s highly advised that your investments in emerging market equities are via emerging market funds. You should avoid purchasing shares in foreign markets directly unless you are intimately familiar with the market’s regulations and restrictions. You must also have the time to stay engaged. Personal Investors usually lack this requirement.

These problems are offset by emerging market’s room for growth. They often provide substantially higher potential long term returns, but at higher volatility and risk for loss. Emerging markets also have less correlation to developed markets, especially in small or micro capitalization firms which are limited to their domestic region.