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Liquidity or Marketability

What is Liquidity

The information in this site does not contain investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. One way to understand liquidity is to examine the level of difficulty at which a transaction can be completed. The easiest transactions, which are cash transactions, are also very liquid. A company may be very liquid but not solvent, or very solvent but not liquid. In order to function effectively in the market, firms need to be both. However, if you do not have cash but own a collection of valuable postage stamps that are probably worth more than $10,000, the car salesperson is unlikely to trade the car for your stamps.

By the end of next week you will feel confident in the stock market. The American manufacturer of supermarket food JM Smucker Co also operates a pet food business including brands such as Milk-Bone and Meow Mix. It’s also the producer of the peanut butter JIF, kid’s all-time favorite filling. The company offers a 2.96% dividend yield and in the third quarter reported a 7% increase in net sales. Small-cap stocks can be liquid too, but usually less liquid than those with higher capitalization.

Understanding Liquidity

Take liquidity into account when you examine your finances so you can assess your cash flow, plan for the future and prepare for the unexpected. But learning about the liquidity What is Liquidity of your assets can help you gauge how flexible your money situation is. Learning some liquidity basics could help you make informed decisions about your investments.

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Another measure of stock liquidity is the difference between bid and ask prices or the bid-ask spread. Transactions can only occur when the highest price a buyer is prepared to pay matches the lowest price a seller will accept. If the bid-ask spread is high this is a sign that an asset is illiquid. This concept can apply to financial markets, banks, companies, their stocks and assets. It can apply to anything from the banking system as a whole to individuals.

Understanding Financial Liquidity

It excludes inventories and other current assets, which are not as liquid as cash and cash equivalents, accounts receivable, and short-term investments. As you can see in the list above, cash is, by default, the most liquid asset since it doesn’t need to be sold or converted (it’s already cash!). Stocks and bonds can typically be converted to cash in about 1-2 days, depending on the size of the investment. Finally, slower-to-sell investments such as real estate, art, and private businesses may take much longer to convert to cash . Other investment assets that take longer to convert to cash might include preferred or restricted shares, which usually have covenants dictating how and when they can be sold.

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