What is a fragmented market?
A fragmented market is a sector that has no single clear leader – instead, lots of players fight out for supremacy. Learn all about fragmented markets, and whether they present trading opportunities, here.
What is market fragmentation?
Market fragmentation is a situation in which a marketplace is home to lots of diverse groups of consumers, each demanding a unique product that caters to their specific needs. When market fragmentation arises, no single product can dominate.
The process of market fragmentation means that companies must specialise to succeed. This specialisation makes it very hard for one business to leave the others behind, which can lead to a fragmented market.
Restaurants and takeaways, for example, are often cited as classic examples of fragmented marketplaces. Consumers won’t all flock to a single restaurant or takeaway en masse, instead choosing an option based on cuisine, price, location and more. In these circumstances, it becomes very difficult for one business to surge ahead of the others, keeping the market fragmented.
Want to start trading fragmented markets today? Open your City Index account– or try out trading with a risk-free demo.
Pros and cons of fragmentation
Fragmentation might sound like a bad thing, but these markets come with some unique advantages. Chiefly, the lack of a clear leader means that new entrants can find a quick path to profitability. This can be good news for investors and traders too, as smaller, cheaper stocks have a better chance of succeeding.
However, there are downsides to fragmentation too. While it may be easy to enter the market, establishing a dominant position, as we’ve seen, is extremely difficult. This can put a ceiling on the growth companies can achieve.
Fragmented market vs concentrated market
A concentrated market is the opposite of a fragmented market. Here, the landscape is dominated by one or two major players, which makes it very difficult for new companies to attract customers.
Consumers in a concentrated market tend to have very similar needs, which means it is easy to cater to them with a single product line. Utilities providers, for example, don’t need diverse sets of products to attract lots of new customers.
Concentrated markets are often measured using the concentration ratio (CR), which tells you how many participants are dominating a particular sector. A CR of three, for instance, means that just three companies have control over a given market. A CR of one means that a single business has a monopoly.
Unlike fragmented markets, concentrated markets are seen as highly uncompetitive. A few players have huge market share, which can discourage innovation and lead to high prices.
Defining a fragmented market
There’s no strict definition of a fragmented market. However, there are a few conditions that usually tell you whether you’ve found one:
-
Low barriers to entry
As we’ve covered, the main positive of a fragmented market is that new entrants can easily make their own niche and start operating profitably. So, if you’ve spotted a sector where new companies seem to pop up all the time, there’s a strong chance that you’ve found a market that’s fragmented.
-
Strong innovation
With lots of players and high competition, segmented industries are often a hotbed of innovation. Software, for example, is often fragmented – with lots of new companies breaking the status quo, preventing established businesses from taking control – and tends to see lots of new breakthroughs.
-
Lack of scale
One of the drawbacks of catering to a fragmented customer base is the difficulty in taking advantage of economies of scale. With lots of diverse sets of consumers leading to lots of diverse sets of products, taking advantage of such efficiencies is difficult.
How to trade fragmented markets
Fragmented markets can offer trading opportunities, particularly in watching for new entrants that may be set to deliver growth. To start trading fragmented markets today, follow these steps:
- Open your City Index account and add some funds
- Use our market screener to find 1000s of stocks to trade
- Choose to go long or short and set your position size
- Execute your trade
Or you can trade with zero risk using a City Index demo account. These are completely free and come with virtual funds so you can try out trading on live prices.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.
ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.
City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.
The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.
The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.
The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
© City Index 2024