Market Segmentation Theory

AAA

DEFINITION of 'Market Segmentation Theory'

A modern theory pertaining to interest rates stipulating that there is no necessary relationship between long and short-term interest rates. Furthermore, short and long-term markets fall into two different categories. Therefore, the yield curve is shaped according to the supply and demand of securities within each maturity length.

INVESTOPEDIA EXPLAINS 'Market Segmentation Theory'

Also called the "Segmented Markets Theory", this idea states that most investors have set preferences regarding the length of maturities that they will invest in. Market segmentation theory maintains that the buyers and sellers in each of the different maturity lengths cannot be easily substituted for each other. An offshoot to this theory is that if an investor chooses to invest outside their term of preference, they must be compensated for taking on that additional risk. This is known as the Preferred Habitat Theory.

RELATED TERMS
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective ...
  2. Liquidity Preference Theory

    The idea that investors demand a premium for securities with ...
  3. Realized Yield

    The actual amount of return earned on a security investment over ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  5. Market

    1. A medium that allows buyers and sellers of a specific good ...
  6. Preferred Habitat Theory

    A term structure theory suggesting that different bond investors ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Investing Basics

    The Five Biggest Stock Market Myths

    Stocks that go down must come up, right? Wrong. We bust this myth and four other common market misconceptions.
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Investing Basics

    How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  4. Investing Basics

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money.
  5. Fundamental Analysis

    Do-It-Yourself Analyst Predictions

    Regular investors can build their own financial models using the mosaic theory.
  6. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  7. Investing

    Making Sense Of Market Anomalies

    Stocks sometimes thwart the efficient market theory by showing some very unusual patterns.
  8. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  9. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  10. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center