Tag: what is liquidity, stock liquidity, highest liquidity, lowest liquidity

Market liquidity is a business term that refers to the ability to quickly buy or sell goods in the market without being affected by price factors. And the time period for buying and selling commodities is usually short-term.

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The basic property of a highly liquid market is that it is always available and many people buy and sell at the same time. A market is very liquid if it is available and there are many people buying and selling in large volumes. In addition, trading orders do not affect the price much in this market.

In accounting, current assets are divided into five categories and arranged by liquidity from high to low as follows: cash, short-term investments, receivables, short-term advances, and inventories.

Classification by liquidity

Cash has the highest liquidity, always directly used for payment, circulation, and storage. And inventory has the lowest liquidity because it has to go through the distribution and consumption stages to turn into receivables, and then from receivables after a period of time to cash.

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Liquidity of securities

Liquid securities are those that are readily available for resale, have relatively stable prices over time, and have a high probability of recovering the original investment. Thanks to the stock market, investors can convert the securities they own into cash when they want, and liquidity is one of the attractive features of securities to investors. Liquidity shows the flexibility and safety of investment capital, the more dynamic and efficient the market is, the higher the liquidity of trading securities.

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When choosing securities to invest in, investors should consider the possibility of reselling them before they mature to regenerate their original investment. If the reproducibility is poor, which means it is difficult to find a buyer or has to be sold at a loss in value, the investor will suffer huge financial losses. This is called liquidity risk in stock investment.

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There is a close relationship between P/E ratio and stock liquidity. Looking at the stock liquidity statistics table, it can be seen that the most actively traded stocks are also those with a P/E higher than the average of the market (higher value than stocks with high volatility). same interest). These are securities with high price appreciation and high surplus value for shareholders through stock splits or new share issuance.