Are Stocks Liquid?
You’ve heard it around business circles. Cash is King. And among all the valuable assets of a company, cold liquid cash tops them all.
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What does liquid assets mean?
Liquid assets deal with the cash on hand or any asset that can be easily converted or changed to cash. Any asset that can be sold with minimal impact on its value is called liquid. Cash on hand is appraised as a liquid asset because it’s easily accessible and can be readily used for the company’s needs.
As you can plainly see, any company will struggle if it does not make cash. It may churn billions of dollars in profits or revenue but if it’s not liquid cash, it will come to blows and struggle to survive. Liquidity in business means the capability to swiftly change assets into cash on several fronts.
Of course, these resources help you go through financial emergencies and challenges and quickly settle credits and liabilities. It’s almost pointless to own prized treasured artwork or real estate properties during a financial crisis. You need cold liquid assets to keep your head above the water.
So what are examples of liquid assets aside from cash?
Your bank account is definitely one — the money in your checking account or savings account. Retirement investment accounts is another. This includes your 410ks and IRAs. Your accounts receivable, certificates of deposit, your stocks —, yes, your stocks — are all examples of liquid assets. These are assets that can be quickly converted to cold cash.
Stocks as an asset class, are comparatively liquid. As you know stocks are easily bought and sold at liquid prices during stock exchanges. But for a stock to be deemed as liquid, it must be sold to another party. There are stocks that are, to a great extent, easier to sell compared to other stocks. Some stocks are not so easy to sell because fewer people wish to buy them. This is the reason why some stocks are comparatively liquid — as some are far more liquid than others.
What affects the liquidity of stocks?
There are two main keys that affect the liquidity of the stocks. One is its number of available shares for trading; and two, the average number of traded shares every day. As mentioned earlier, stocks with fewer available traded shares are definitely less liquid than those stocks with a good number of available traded shares.
Another thing to consider is the term large-cap stocks. A large-cap stock is the most liquid of all stocks because of its large number and high mountable allocation or high volume.
It is also almost always in high demand from stock investors. On the other hand, a small-cap stock to a limited degree has few shares and is not in high demand compared to its large-cap counterpart. Stock experts say that if a little less than 10,000 shares of a certain stock are traded regularly and consistently, that stock is deemed liquid.
The liquidity of the stock varies in conformity with what the stock investors do. According to some insight from experts, when the stock market is in a slump, stocks normally become less liquid. During times of decline, many stock market investors transfer their funds to other asset classes. Fewer investors are willing to buy stocks. Thereby making the stocks less liquid.
What causes a stock to not be liquid?
Stocks that sell less than 10,000 shares a day are called illiquid. If you have illiquid stocks and are in a hurry to sell them, you need to lower your price to draw investors in.
It’s not easy to find many interested buyers for these kinds of stocks. The stocks that sell more than 10,000 shares a day — even up to millions are called liquid stocks. Evidently, stocks of major corporations are liquid stocks.
It’s easier to find investors to purchase a stock if the demand is very high. Sometimes you can even sell these types of stocks within seconds of offering them up at a reasonable price. This is the reason why it’s called liquid stock because it’s faster to convert it to liquid cash.
Such stocks are good to get access to cash because in all likelihood you will be able to sell it faster than you want to.
However, bear in mind that there are no stocks that offer complete liquidity. Only cash is completely liquid. Remember that when you sell a stock, you need to wait for the procedure to be completed. Usually, a settlement between the brokers — once you sell the stocks, the process can take about three working days to complete. So, even if you sell your stocks really fast, you won’t get your hands on the cash until everything has been settled. Money must change hands between the brokers before the cash gets to you.