The liquid rate that an asset is converted into cash determines how easy you can enter or exit an investment. Time is a central factor when investing, and liquidity determines how much time it takes to get your money once an asset matures. Liquidity even helps when taking money out as the market shifts against you. As long as you decide on the liquidity of your investment assets, you can exit your positions according to a strategy that fits you.
When Market Assets are Liquid
Liquid assets are investment instruments that convert into cash with relative ease. The quality of the asset isn’t determined by its liquidity, however. A liquid investment can still present unsatisfying returns, though, it’s easy to get in and out of. Here are some factors that determine the liquidity of an investment:
- Market Participants:
The more people that are involved in buying and selling, the more likely it is that you can close a transaction when you need to.
- Transaction Size:
Large-buy orders, for example, can help clearing agencies, for the bulk of orders can accommodate the market’s sellers.
- Daily Turnover:
The number of transactions play a role, for even when the participants are few, the constant trade orders sustain opportunities for entering and exiting.
- Economic News:
Positive and negative news influences the liquidity of an asset. Positive news can lead investors to flood a market and make buying difficult. Sellers can, likewise, enter the market to make buying easy.
Factors that Establish Illiquid Conditions
An illiquid asset is one that you can buy or sell but with a longer timeframe needed to complete an order. Factors that lower liquidity are determined when you buy or sell.
- Long Term Investments:
The timeframe that someone holds an investment within dictates how long the market takes to acquire or sell an asset.
- Market Prices:
The higher that prices are, the fewer the buyers will be. Prices that go lower allow more participants to get involved and actively trade.
- Market Closures and News:
Bad news, for example, when a company goes bankrupt, can force you to hold an asset longer that you intend to.