Fig. population of the UHNWI (Ultra High Net Worth

Fig. 1: Primary and
secondary market (own creation)


primary market, is where all the artworks are sold from the artist to prospects
buyers (Ginsburgh and Throsby, 2006); prospect buyers are usually Wealth
individuals, Auction houses, Art dealers, Galleries, Art funds and Museums; in
this market, Art experts and art advisors can act on behalf of prospect buyers.
The market is characterized by an imperfect information about prices and
transactions and historical data; for this reason, usually, this market is
associated to a high risk.

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secondary market is basically a platform for reselling works of art, which no
longer belong to the artist but to a first buyer who decides to sell it. The
characteristics and the players of this market are substantially the same as
those of the primary market, even if in this stage there are more often
professionals who act as mediators between the seller and the buyer. These
intermediaries are art experts who, therefore, reduce the risk to the buyer but
indirectly raise the sales costs as they have to be remunerated for their

primary market has lower costs because the intermediaries are not as present as
in the secondary market, but it has a much higher risk, as the buyers, as well
as not having data on the work and the artist, often does not have the
knowledge and skills to evaluate the actual value of a work. However, there is
another way to invest in the art market without making direct investments, by investing
in vehicles that have in their assets an important collection of works of art, the
art investment funds.


Geographical Segmentation


The art
market cannot be divided only in primary and secondary, but must be segmented
also according to geographical locations.

to Deloitte Art&Finance report (2016), although global economic growth
slowed, investment in works of art in Russia and Africa grew by 40% in 2016, in
Europe of 43%, in the US of 42% and in China of 31%. According to Deloitte
(2016) the population of the UHNWI (Ultra High Net Worth Individuals) has grown
of the 61% in the last 10 years, and it will continue to expand. According to
the Knight Frank report (as cited in Deloitte, 2016) the population of the UHNWI
will continue its growth in the next 10 years and will continue to allocate its
investments in art.


Art segmentation by Type


wide world of art can be divided into various sectors, which can be defined for
schools and periods.

It is
important to understand the different characteristics of the different styles
and sectors of the art market, as these can play a fundamental role in the risk
and return of investing in art.

following paragraphs present the main characteristics that differentiate the
various styles, underlining how these can affect the investment in art.


Old Masters

The old
master sector has not geographical boundaries and includes all the works
carried out before 1800.

the old masters, are called blue-chip, according to experts are intended to
appreciate over time. These works are already well-known and appreciated by the
market, so are not prone to market bubbles and is the least volatile sector of
the market.

are the great classics, which will never fall in price because they have now
reached a stability in the market, but which will go up in price very slowly.


Modern Art


is no exact definition of modern art. Modern art contains all the works carried
out from the mid-1800s to contemporary art, which, however, does not have a
start date.

claims that modern art developed through the first abstractions of Monet and
Cezanne, have gone through the fantasies of Van Gogh, all the extravagance and
the avant-garde Parisian starting from surrealism, from abstractionism, from
cubism, flowing into the conceptual art of Marcel Duchamp and then transformed,
after the second world war, in art made of painting, video, performance,
installation and therefore Contemporary Art.

art works are certainly not in the market for as long as the old masters but, these,
are the works that have had an important growth in prices in the last years.


Contemporary art


contemporary art sector is the one that in the last 5 years has grown more than
anyone else, from the great American painter Andy Warhol to the present
(Deloitte 2016).

sector with the higher price increases of all because, in general, the more
recent the work is and the less it costs; the investors are attracted to buy,
because they hope to have important returns with limited investments
(ArtTactic, 2016).

risk is high, due to lack of information, data and track records, and therefore,
the chances of earning are also high. There are many factors that affect this
segment, for this reason, in order to reduce the risk, a great knowledge of the
subject is necessary.






The art
market is very different from traditional markets, as it has characteristics
that are unique; these characteristics can be substantially grouped into three
general factors:

in information

in information

related and transaction costs


These are not the only issues related to
the art market but, are the three main factors to be taken into consideration
when analysing the attractiveness of art investment.


The market is wide and unregulated, the
quantity and quality of information available varies from work to work, as
these works are unique. Due to the wideness of the market, it is not possible
to be aware of all the artworks that exist in the world, it is not possible to
know where they are and in what conditions they are.

Another important missing information is
a common method that can economically evaluate all works of art. All these
factors together represent the inefficiency
of information on the market.


In addition to information inefficiency,
the art market is also characterized by an asymmetry
in information. The lack of a common method for the economic evaluation of
an artwork, leads to an asymmetry in the information because, for example, the
seller who has a thorough knowledge of the subject can find and understand
information that are unknown to the buyer; which, to fill this gap, must rely
on an intermediation figures who can provide to him all the necessary
information. This factor, obviously, has a strong influence on the
attractiveness of art investment.


The described issues of inefficiency and
asymmetry of information in the art market, inevitably lead to an increase in
the costs related to this investment, which are added to the already high transaction costs. From this point
of view the costs related to the investment in art can be compared to those
related to real estate operations.


These characteristics lead the market to
be almost a monopoly controlled by sellers. The disorganization and
disinformation of the buyers leads to a market

High transaction costs, lack of
information and low market liquidity lead to market inefficiency; nevertheless,
the advent of technology has led to a change in the market, auction houses data
can be reached more easily and, therefore, there has been an evolution of
market (Frey, 1997) that has allowed a wider audience to find information that
before were only available to some professionals of this market; this evolution
has therefore let to a reduction of market

However, this market imperfection has
both negative and positive aspects, according to many financial advisors, an
inefficiency of the market can be an excellent opportunity to outperform
through investing in art.






After a careful analysis of the most
important characteristics of the market, art cannot be considered as a specific
type of good, but there are some characteristics of art that must be considered.
For example, paintings are both goods that last over time and goods that have
financial value. These features will help to understand in more detail what are
the actual factors that make art an investment asset.




Art cannot be considered a commodity
good, but has characteristics that associate it with this type of goods. A
commodity good is a good that meets the needs of a consumer or provides
pleasure. Art, unlike other assets such as stocks and bonds, does not provide
returns and dividends but has an intrinsic value.

A distinction must be made between two
different types of investors, active investors, for whom art produces pleasure
as a consumption value, then simply hanging the artwork on the wall; and
passive investors, for whom art does not produce value if not before selling it
(Scott, 1994).

Similarly, to commodity goods, art prices
are determined by the market, by the equilibrium between supply and demand;
works of art, unlike commodity goods, do not have quality standards to evaluate
them, each work is unique and has its own characteristics, in fact prices can
be significantly different. Although it is possible to find comparative factors
in the works of art, such as dimensions, period of realization, the artist or
the subject, these are not sufficient conditions to have a similarity of




Art is defined as a positional good, a good whit a limited supply and, at the same time,
an high demand.

The pleasure that the owners of artworks have
from the purchase, is not only limited to attach it to a wall and be able to
watch whenever they want, but especially from the social status that the buyer
obtains by buying a certain work of art. The more a painting is rare and
expensive, the greater is the wealth associated with the owner and, therefore,
the image that the owner can give of himself. For this reason, art is often
defined to as a “bragging good” (Forbes, 2004).


In conclusion, therefore, art is a good
with very different characteristics, which associate it to different types of
good. These characteristics of susceptibility and instability, increase the
uncertainty, that already exists, if is safe and profitable to invest in art. Forecasts
of future art price movements, are influenced by this unpredictability (Forbes,




The most important factors for the
determination of the price of an artwork are three: the offer, the demand and
the artistic quality of the work.

It is very important to understand how
these three factors behave, in order to analyse and understand the market and
to make forecasts about future price movements; and in order to decide if it
makes sense to invest or it is better to exit the investment.