The financial news is constantly talking about the term liquidity. This is one of the most commonly used terms in any market. Understanding its meaning is vital for anyone who deals with trade or finance, in principle.
Liquidity - the ability of a product or asset to be sold at the current price.
In simple words, liquidity is the ability to sell something as quickly as possible at the current market price.
Speaking about liquidity, it is worth noting that in the market it is calculated for assets of any kind. There is not one, single parameter for assessing liquidity; each type of asset has its own. The calculation is based on the assets themselves, their quantity in any enterprise, creditworthiness, current value and much more. The market is not in a static state, because the liquidity of any asset - that is, its market demand, changes regularly. For example, regarding the liquidity of enterprises, this is the most relevant, because in their assessment the liquidity indicator is considered extremely important.
The liquidity of the company - the solvency of the company in relation to creditors.
That is, a certain enterprise has enough assets to pay off creditors if necessary. The loan maturity must correspond to the sale term of existing assets.
The liquidity of the enterprise is usually divided into several factors:
Speaking about the liquidity of assets, you need to understand that it is not only about money, but also raw materials, goods, property, real estate and much more. And each asset will have its own liquidity features.
Liquid assets are goods that are quickly sold at the current market price.
Assets are usually divided into several types:
It is also common to divide assets depending on the how quickly they are realized:
In addition to assets, there are so-called liabilities. These include loans, and other debts. Liabilities are also divided into several types, according to the speed of payment of debts:
On comparisons of liabilities and assets, the liquidity of enterprises is calculated. To show absolute liquidity, there are several positions:
The first three show that the assets of the enterprise exceed the amount of debts, the fourth shows the advantages of the personal capital of the enterprise over intangible assets, that is, the liquidity of the enterprise.
Bank liquidity is the ability of a bank to pay its own customers if necessary.
It is believed that the more a bank issues loans, the lower its liquidity. Therefore, any banking organization needs reserve finance. This is not only money, but also securities, precious metals and other liquid assets. At the same time, banks prefer to limit their own profitability. Each bank tries to carefully protect its own reputation and the amount of finance raised. If a bank can safely serve its own customers, without lowering liquidity, it is considered self-liquid.
Speaking about market liquidity, we must understand that we are talking about any market, financial, commodity, foreign exchange and so on. The more transactions and contracts concluded on the market, the higher its liquidity. The difference between the amount of contracts concluded and the value of goods delivered under contracts, the so-called “churn” (black), is an indicator of market liquidity.
Speaking about the stock market, it should be noted that securities are estimated by the size of the spread and the total number of transactions. The formula is simple: the more transactions and the smaller the spread, the higher the liquidity. That is, if some shares can be quickly sold (or bought) and the price does not change too much, then these shares can be called liquid.
The most liquid types of assets in the stock market are:
The liquidity of investment portfolios is calculated through the average value of all assets included in the portfolio and each asset separately. The value of the asset, its profitability, the level of potential risk, and the term for which deposits are made are important here.
In the real estate market, the situation is similar to other markets. If a property can be quickly sold (or bought) - it can be called liquid. But it must be clarified that real estate, in principle, has lower liquidity than securities or most goods connected with enterprises. This is due to the large amount of time that goes directly to the purchase and sale transactions. In addition, non-economic factors, such as a man-made or natural disasters, sharp price rises, or declining prices of the surrounding properties, can prevent a deal.
Also, certain factors influence the liquidity of real estate:
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