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Inverted Market

Moneyzine Editor
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Moneyzine Editor
1 mins
November 6th, 2024
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Inverted Market

Definition

The term inverted market is used to describe a condition where spot prices are higher than the long-term price of a futures contract. An inverted market is considered an abnormal market condition.

Explanation

When the price of a futures contract trading in the near term is higher than the equivalent contract with a longer term to expiration, the market is said to be inverted. Typically, futures contracts are more expensive the longer the term to expiration. This is due to carrying costs, which result in a price premium for longer-term contracts.

Inverted markets can develop when the supply of the underlying asset is short or restricted. This shortage drives up demand in the near term, while the market expects the relationship between supply and demand to return to a more normal condition over time. That is to say, the shortage of supply is only a near term concern.

Related Terms

  • Carrying Charge Market
    The term carrying charge market is used to describe a condition where spot prices are lower than the long-term price of a futures contract. A carrying charge market is considered a normal market condition.
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  • Equilibrium Price
    The term equilibrium price refers to a state in which the quantity of goods supplied is equal to the demand for the same goods. Prices are typically stable for a product when they reach the equilibrium price.
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  • Fast Market
    The term fast market is used to describe a condition whereby the rapid trading of a security results in a delay in the transmission of data concerning sales and price quotes. While a fast market can affect common stocks, the term is more often associated with the trading of options.
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  • The term seller's market is used to describe a condition whereby demand for an asset exceeds supply, thereby providing sellers with negotiating leverage. While a seller's market can apply to the sale of any asset, it's oftentimes associated with the real estate market.
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  • Buyer's Market
    The term buyer's market is used to describe a condition whereby the supply of an asset exceeds demand, thereby providing buyers with negotiating leverage. While a buyer's market can apply to the purchase of any asset, it's oftentimes associated with the real estate market.
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