Liquidity Importance
Till date, majority of investors go after stocks of technology companies ranging from Infosys Technologies to Mascon Global. Nonetheless, financial analysts have always discouraged the retail investors from purchasing certain stocks. Most of these stocks have a great growth potential, but are still not the recommended ones. Have you ever thought of the reason behind it? Well, the simple reason for this is that they are not at all liquid. |
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Liquidity is a vital factor that must be taken into consideration when making any investment. This is simply because liquidity can actually help you reverse the investment decisions. For instance, if you purchase 10 shares of an XYZ company at current value in a hope that the stock would climb in the coming fortnight. Now, if to your disappointment, the stocks fall, you may incur heavy losses if the stocks you purchased have no liquidity. On other hand, if the share is liquid, you can sell it off and reverse the investment made. Thus, liquidity holds a lot of importance.
Liquidity of a stock is usually directly linked to the extent of management control over the stocks of the company. If the company’s shareholder base is large, management control over a significant proportion of stocks gets reduced, thereby enhancing the liquidity and making selling and buying of such stocks easier. The importance of liquidity and its association with control is beneficial for all kinds of investment decisions. As an example, consider a finance company that has to choose between investing in bonds and extending loans worth $ 1 million. If the company goes for the second option, it would be able to exercise more control. However, in this case, it will need to stick to this investment until maturity, thereby putting liquidity at risk. It would not be able to survive in event of a financial crisis. Therefore, liquidity is very important factor to be considered for investments.
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