log #83

When building a portfolio, stock liquidity is important for many reasons. First, it allows you to easily cash in on your stocks, which can be important if you experience economic instability. Additionally, high liquidity also means strong market and stock performance. Liquidity is used to describe how quickly a stock or other investment can be sold. A stock that can be bought and sold at any time would be considered extremely liquid because it can be sold and turned into cash.

• If you can’t afford to lose all of the money which you plan on investing, it’s far safer to invest in easy to sell, high liquidity stocks than hard to sell, low liquidity stocks.
• Any historical returns, expected returns, or probability projections are provided for informational and illustrative purposes, and may not reflect actual future performance.
• Without consistent cash flow or access to low-cost debt, startups depend on liquid reserves to meet obligations, respond to delays, and avoid raising capital at unfavorable terms.
• This information is not intended to be used as the sole basis of any investment decision, should it be construed as advice designed to meet the investment needs of any particular investor.

Bid-Ask Spread

For purposes of this section, Bonds exclude treasury securities held in your Jiko Account, as explained under the “Jiko Account” section. With companies, the calculations can get a tad more complex, but still generally refer to how their short-term assets match up against short-term liabilities. Before joining, always check the risks and understand how the specific pool works. Choose well-established platforms to avoid scams or security issues. After depositing, you’ll receive LP tokens that represent your share in the pool.

Spending made smarter

Surplus cash reduces the chance that founders accept punitive debt or a down-round equity raise simply because one customer delayed payment. During diligence, venture partners check bank statements first, knowing that strong liquidity ratios often shift a decision from watch to wire. High liquidity means orders fill at or near the quoted price, slippage stays minimal, and capital moves without delay. For institutions, that trims market impact; for individual traders, it cuts transaction costs. If you need to move size quickly, high liquidity is the difference between slipping a few basis points and giving up whole percentage points.

• Globally, major stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ are known for their high liquidity.
• Boards have decided that a larger cushion is cheaper than cutting teams or raising capital under duress.
• For example, during a market crash, even typically liquid stocks may experience reduced liquidity as investors rush to sell.

Financial markets

The shorter the gap between “sell” and “spend,” the higher the liquidity; the steeper the markdown or the longer the wait, the lower it goes. When the bid-ask spread is much wider, it shows that there aren’t many traders eager to get transactions done. This means it may be hard to get in or out of your position without pushing the price up or down too much.

Illiquidity increases the risk that investors will not be able to sell their assets when needed, which could cause them to incur borrowing costs. Or, they might have to sell assets at less than what’s considered a fair price to get out quickly. Liquidity risk management could involve holding assets of varying liquidity levels to be able to meet short- and long-term goals. Even if the economic conditions are strong, market sentiment can still affect liquidity. For example, if investors are fearful of a possible recession, that alone could cause a liquidity crisis. Investors might favor assets that are already very liquid, like Treasuries, while other assets like some stocks that are normally quite liquid become less liquid, due to lower buying demand.

What Is Stock Liquidity? (Amazing Infographic)

While it’s a valuable asset, selling it quickly for its full value might be challenging. The market for such cars is niche, and finding a buyer who’s willing to pay the asking price on short notice could be difficult. Highly liquid markets are more stable because participants can enter or exit positions without causing drastic price swings.

You, as a liquidity provider, deposit equal values of both tokens into the pool. Rho is a fintech company, not a bank or an FDIC-insured depository institution. Checking account and card services provided by Webster Bank N.A., member FDIC. Savings account services provided by American Deposit Management Co. and its partner banks. International and foreign currency payments services are provided by Wise US Inc.

Liquidity can significantly affect the financial health of markets, companies, and individuals. However, high liquidity isn’t always better than illiquidity, as some investors view investments in illiquid private equity funds as worthwhile. Still, it’s important to consider liquidity to ensure that you won’t have to go into debt if you face unexpected expenses.

High liquidity gives investors confidence, thereby helping to encourage investment and ensuring that money can flow as needed among buyers and sellers. Liquid assets, however, can be easily and quickly sold for their full value and with little cost. Companies also must hold enough liquid assets to cover their short-term obligations like bills or payroll; otherwise, they could face a liquidity crisis, which could lead to bankruptcy. You earn a share of the trading fees every time users facilitate trades using the pool. Some platforms also reward you with governance tokens, increasing your profit through yield farming. Liquidity pools open the door to decentralized income, faster trades, and a new kind of financial freedom.

Here, we’ll take a closer look at what liquidity means in different situations, how to measure it, and more. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Real-World Examples of Liquidity in Action

At Public.com, you can explore stocks with varying liquidity levels and build a diversified portfolio. We designed Public for investors who take their financial futures standard stp account seriously and seek a transparent platform focused on long-term growth. Join Public today and start building your multi-asset portfolio with the tools, data, and insights you need to make informed investment decisions.

These pools use optimized AMMs like Curve’s StableSwap algorithm, which allows low-slippage trades. The reduced volatility makes stablecoin pools ideal for minimizing impermanent loss. They allow you to swap one token for another based on market demand. These pools usually follow the traditional automated market maker (AMM) model, such as the constant product formula used by Uniswap. You’ll often find trading pairs like ETH/USDC, WBTC/DAI, or other token combinations.