Asset Auctions
Some Liquidity and Auction Rate Securities Investments
Some say that financial investments are all about risk. Big risk, big return – low risk, low return. From this perspective, creating the potential for big returns through taking large risks is the primary goal of any savvy investor.
For many would-be investors, however, the potential for gain is not enough to offset the risk; many investors are not so much interested in making enormous sums in a high-risk environment as making smaller, but safer, for more details visit to www.auction-professional.com amounts of money. Some of these investors are private citizens seeking to steadily grow their wealth; others may be large corporations looking to responsibly invest their funds.
Auction Rate Securities
The auction rate securities market was once a highly attractive option for such safety-minded investors. By adding a fluctuating, auction-reset interest rate onto long-term bonds, broker-dealers created a debt instrument which could benefit both borrowers and lenders. Issuers enjoyed the ability to deal with their long term debts in the short term, for more details visit to www.auction-words.com while bondholders could take advantage of asset liquidity while receiving a higher return than most money market instruments.
What is Liquidity?
Liquidity is a measure of how easily and efficiently an asset can be converted into cash. It is determined by measuring three qualities of the asset:
- How rapidly an asset can be sold
- How frequently an asset can be sold
- How much of the asset’s value is lost during a sale
Basically, a liquid asset is one which can be sold rapidly, at virtually any time, without losing much of its value during the transaction.
The Significance of Liquidity
Why is liquidity an important concept for investors? Liquidity is essentially a measure of how easily an investor can enter and exit a given market. In some ways, liquidity is analogous to demand, though not identical. An asset for which demand is high, constant, and enduring is likely to have high liquidity, as potential buyers are always available and usually willing to pay well to take on the asset.
Liquidity allows an investor to limit risk and reduce his or her commitment to the market; by purchasing assets with high liquidity, the investor retains the ability to convert his holdings to cash at any time – either to cut losses or walk away with a significant profit. It also creates a safety net for investors who may have other financial obligations by allowing them access to their invested funds on short notice.
About the Author
Asset Auctions, The New Strategy for Central Banks (IESE Prof. Xavier Vives)
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