Liquidity is a common concept that any investor has heard of. Liquidity is often understood as a metric that companies use to test their ability to cover their short-term financial obligations. Investors are often very concerned about the liquidity on the exchange because it will bring many benefits to them in trading. So what is liquidity and the basics to know about liquidity? Let's follow PHS to learn through sharing below.
What is liquidity?
Liquidity overview
Liquidity is a commonly used concept in industries related to the financial sector. Liquidity has the English name Liquidity, which means the fluidity, or the degree of liquidity, of any product/asset that can be bought or sold without much impact on its market value. More simply, liquidity refers to the ability to convert into cash of any product or asset.
With the above definition, cash is considered the most liquid asset, because it can be used to buy, sell and exchange goods/services with its value almost unchanged. In addition, there are some asset classes such as real estate, stocks, machinery, etc., which are less liquid because it takes time to convert these assets into cash.
The meaning of liquidity
- Keep track of your business's finances: You need to have enough cash to meet your financial obligations. Measuring liquidity helps you find the right balance, track your company's financial health, and position it for strategic growth.
- Secure a loan or other source of capital: Banks and investors look at liquidity ratios to determine a company's ability to pay its debts.
- Shows the dynamic and efficient level of the market: When the market is more active, the more organizations and individuals participate, the higher the liquidity.
Classify assets by liquidity
Here are examples of popular investments:
- Cash
- Foreign Currency (FX)
- Guaranteed Investment Certificate (GIC)
- Government bonds
- Corporate bonds
- Stocks (publicly traded)
- Goods (material)
- Real estate
- Art
- Private enterprise
In particular, cash is considered the most liquid because it is a tool used directly for payment, exchange, circulation, and storage of goods and assets. Stocks and bonds can usually be converted to cash in about 1-2 days, depending on the size of the investment.
Some losses from liquidity risk
- For banks: Banks will be forced to raise interest rates to mobilize more capital. Meanwhile, the lending interest rate is unchanged, so the revenue from the bank's activities may be reduced.
- For customers: Customers may have to borrow at a higher interest rate.
- For the economy: Liquidity risk indirectly affects the quality of investment activities and the activities of borrowers.
Liquidity risk in securities
The risk in securities liquidity is when investors need a lot of time and expense to recover capital. This means that it will be difficult to find buyers at the expected price, or investors will have to accept a lower price in exchange for cash. In other words, the investor will bear a certain loss.
Products such as gold, real estate or insurance, ... on the market have a connection with each other. When the market fluctuates, it will comprehensively affect the stock market, causing liquidity risk.
Therefore, when choosing securities for investment, banks or investors should consider the possibility of resale to preserve the original investment capital. This is a way to avoid the risk of securities, prevent the possibility of not being able to resell, or lose value when selling.
Conclusion
So, the basic concepts of liquidity have been detailed by PHS in the above article. Hopefully through these sharing, businesses and investors will have a reasonable plan to limit the impact of liquidity risk. Or if it's too difficult to invest in stocks and don't know where to start, come to PHS. PHS will always accompany you on the path of financial - securities investment.
