As an investor, what factors would you consider before investing in the emerging stock market of a developing country?
Answer: An investor in emerging market stocks requirements to be concerned along with the depth of the market and the market’s liquidity. Depth of the market considers to the opportunities to invest in the country. One means of the depth of the market is the concentration ratio of a country’s stock market. The concentration ratio often is calculated to depict the market value of the ten largest stocks traded like a fraction of the total market capitalization of all equities traded.
The lower the concentration ratio, the less deep is the market. i.e. most value is concentrated in just a few companies. Whereas this does not necessarily involve that the largest stocks in the emerging market are not good investments, it does, though, suggest that there are few opportunities for investment in that country and that proper diversification in the country may be hard. In terms of liquidity, an investor would be wise to observe the market turnover ratio of the country’s stock market. High market turnover presents that the market is liquid, or that there are opportunities for purchasing or selling the stock rapidly at close to the current market price. This is significant as liquidity means you can get in or out of a stock position quickly without spending much more than you intended on purchase or receiving less than you supposed on sale.