A soft market is a market in which the number of sellers outstrips the number of buyers. This surplus of supply tends to drive prices down, as sellers are eager to capture buyers and they may be willing to make significant concessions in order to seal a deal. Markets tend to be cyclical in nature, when means that soft markets periodically arise in a range of industries. People who are not familiar with market trends can be caught on the wrong side of a soft market.
Classically, a soft market impacts a particular commodity or industry. For example, the market for textiles might become soft, or the market for real estate might soften. For sellers with a great deal of capital, the soft market can be a temporary inconvenience, but they will have the capital to ride out the market. Sellers who lack capital may find themselves going out of business as they become unable to sell their products.
One of the more notorious soft markets is that which occurs in the real estate industry periodically. The market for real estate can soften for a variety of reasons, and is characterized by a glut of houses which sit on the market, rather than selling. Often, rather than withdrawing their homes and allowing the market to recover before relisting them, people will start to drop the asking price, contributing to an overall decline in prices as other sellers attempt to match rivaling low prices. Buyers will take advantage of this to push for additional concessions.
Soft markets are often referred to as “buyer's markets,” reflecting the fact that buyers usually get to dictate the terms of the deal, and they can drive hard bargains with sellers who absolutely must sell. Some buyers may take advantage of a soft market to make investments which they expect to see returns on in the long term. This can be dangerous, however, as the market could soften further or take a long time to recover, requiring people to hold on to investments for an extended period of time.
One of the worst things people can do during a soft market is panic and dump their investments. For people who can afford to do so, retaining investments is a much better decision. Trying to get rid of investments can result in taking a loss, and there is not reason to do this unless it cannot be avoided. Diversifying investments and making sure that some capital is in a liquid form can also help people weather soft markets when they occur.
