Arm's Length Market

  

A distance that is not large enough when the annoying store clerk has rancid breath. In truth, arm’s length market means you don’t know the person you’re doing business with (on a personal level).

This term can apply to many areas of business. For example, if you’re purchasing stock in McDonald’s, you probably don’t know any of the executives of the company who would likely have inside information regarding how well or poorly this quarter was going. You don’t have insider info, and you’re not involved in a relationship with anyone who is involved in McDonald’s.

This can also apply to real estate (like when you buy a home). If you don’t know the person you’re buying from or selling to, this is considered an arm’s length transaction in which you’ll pay (or receive) a fair price. If you’re not operating within arm’s length, and you’re not paying fair market value, you might have to pay some fancy taxes.

Related or Semi-related Video

Finance: What are Prudent Investor Rule ...8 Views

00:00

finance a la shmoop what are prudent invest our rule standards via know your

00:07

client rule and unsuitable recommendations well let's start with

00:13

the prudent investor rule standards their standards for what is rational [Man discussing prudent investor rules]

00:17

like those who can't afford to take a ton of risk think little old ladies who

00:23

are retired with just enough money to make it to you know the end well they [Old woman with pocket watch]

00:28

can't afford to take the risk of volatile equities like a small cap fund

00:32

that can whipsaw 30% up and 30% down in any given year no way not acceptable not

00:39

suitable not prudent or what about they're investing in a venture capital

00:43

fund or a private equity fund that takes seven years or more before it normally

00:47

even begins to distribute IPO sales or proceeds so no in seven years that [Woman counting cash]

00:52

little old lady is more likely doing the backstroke 24 by 7 yeah well

00:57

recommending venture capital investments to a little old lady who needs cash [Old lady and little pooch graves]

01:01

liquidity to make payments on her dentures is an unsuitable recommendation

01:06

you can't do that so what's prudent or suitable for her well bonds government

01:11

bonds shaken not stirred maybe a few corporate bonds and maybe a spicy 10 or [old lady's portfolio piechart appears]

01:17

maybe 20% of her portfolio allocated to equities with a lot of safe boring

01:22

dividend yield think companies like AT&T and GE and IBM oil companies a whole lot

01:29

of nice boring math on her way to the grave then what if the client is a [Insurance company man approaches girl with cheque]

01:33

parentless teenager who just inherited a million bucks from mom and dad courtesy

01:39

of the insurance company of the drunk driver who killed them both when they [Police sirens appear]

01:43

cross the double yellow line should that teen be in government bonds no that

01:48

would be unsuitable at least not all in government bonds in fact probably very

01:52

little in government bonds why well for that teen a heaping allocation to a

01:57

small calf equity fund is totally prudent appropriate and smart because [Equity fund growth graph appears]

02:02

that teen likely has decades maybe even half a century before she'll want to

02:07

call or use that money so time will bail her out of the year-to-year short-term

02:12

volatility because over time the market goes up and

02:16

usually a lot let's gaze for a moment on this beautiful S&P 500 stock chart for [Stock chart for S&P 500]

02:22

glassed-in and give her to take century kind of lovely well the basic idea for

02:26

this rule is that the financial advisor has to recommend investments that are [Financial advisor reading piece of paper]

02:30

prudent and appropriate given the client's age health financial needs

02:35

appetite for risk their own career strength likelihood of being abducted by

02:40

aliens etc and a time at which point they'll need to turn their investments [Alien spacecraft hangs over city]

02:44

into cash to pay for stuff well the good financial adviser knows her client and

02:48

there actually is a rule called the know your client rule but you can only know

02:52

them so well before you start you know crossing the lines [Man sleeping and woman lying awake in bed]

Up Next

Finance: What is a regular way contract?
1 Views

A regular way contract is a normal security trade. Nothing fancy or out of the ordinary, just... regular. Especially if it's on a high-fiber diet.

Finance: What are Insider Trading And the Securities Fraud Enforcement Act Of 1988?
11 Views

What is insider trading and the Securities Fraud Enforcement Act of 1988? It's nothing too complicated, if this minute long video is any indication.

Finance: What is the Greater Fool Theory?
11 Views

The Greater Fool Theory posits that there is always a greater fool out there to buy an item at a higher price... until there isn't.

Finance: What is mark to market?
2 Views

What is mark to market? Is it when Mark Zuckerberg writes the stock market a letter, thanking it for being a friend?

Find other enlightening terms in Shmoop Finance Genius Bar(f)