How to assess liquidity in stock investments

1. How to assess liquidity in stock investments? In this article, you can get a clear-cut insight into liquidity assessment. But first, let us start with the basics. To date, cash and cash equivalents are considered the most convenient way to transact. This is because they are highly liquid assets. You must have heard the term ‘liquidity’ plenty of times. However, have you ever wondered what role it plays in stock investments? Liquidity essentially determines how soon you can convert an asset into cash for transacting. And it is a quintessential factor when it comes to making investments in avenues like the stock market. What is liquidity? The ease with which you can convert an asset into cash is termed liquidity. Different categories of assets have different levels of liquidity. Marketable securities, for instance, have a ready market. This increases their liquidity as one may quickly sell and get cash in exchange. In contrast, fixed assets such as real estate may take longer to sell or liquidate. This renders it illiquid. Tangible assets, such as valuable paintings, automobiles, or any form of collectibles are also fairly illiquid. By this measure, cash becomes the most liquid asset there is.

2. To understand the implications of this concept, let us take an example. Assume that you wish to purchase an air-conditioner worth Rs. 50,000. However, you do not possess cash at the time. Instead, you have an antique worth the same amount. It will be quite tough to find someone interested in buying that antique, so you can get some cash. This makes keeping cash in hand necessary since it’s the most hassle-free and widely accepted medium of exchange. What is a market’s liquidity? Market liquidity refers to the asset’s marketability, transparency, stability, and capability to turn itself into cash. High market liquidity is marked by the ascending supply and demand for the asset. Assets that have high market liquidity include: Shares and debentures Commercial papers Government bonds and treasury bills Certificates of deposits With thousands of ready buyers and sellers in the stock market, shares of a publicly-traded organisation are considered highly liquid. Let us understand the liquidity position of the stock market. Liquidity in the stock market The stock market is a platform that allows easy and quick buying and selling of securities of listed companies. Stocks of companies are widely traded in the stock market. A stock’s liquidity is measured by how seamlessly it can be bought or sold, without causing major fluctuations in its market price. Those stocks which are most widely traded in the market and have large market capitalisation are also amongst the most liquid stocks. Read more about liquidity in investments