What Is Liquidity? Securities or financial products that can be disposed of and cashed in at any time in the markets are called liquid products. The common feature of liquid products is that they can be easily disposed of without any loss. To give a concrete example, land, land, house or passenger vehicles can be evaluated in this category, but liquidity rates are lower depending on the market situation. But stocks, cheques and bonds are much more liquid products than other investment instruments.
Even hours traded in global markets such as Forex can affect the liquidity of investment instruments. For example, when Asian countries trade heavily, the liquidity ratio for the Euro, the European currency, may be low. Investors should do a good liquidity analysis of products so as not to cause losses.
Generally accepted liquidity ratio calculation formula in markets;
Liquidity Ratio = (Current Assets-Inventories) / Short-Term Liabilities
0-0,60: Low Liquidity Ratio
0.60-1.00: Acceptable Liquidity Ratio
1.00 and above: good liquidity ratio.
The stocks mentioned in the formula refer to the assets with the lowest liquidity, and the current assets refer to the assets with higher liquidity.
When a liquidity analysis is performed for any individual or company, the amount of money remaining after the individual or company’s debts are paid will also reveal the liquidity situation. In this area, in particular, banks are trying to partially reduce the lack of liquidity in the market by lending cash in exchange for collateral.
What Is The Importance Of Liquidity?
Liquidity is very important, especially in stock market investments, and they provide investors with instant investment change, flexibility and convenience, ensuring market control and dominance. Products with high liquidity are also sold quickly without losing time during the sale, and the investor does not suffer any losses.
If we talk about the importance of liquidity from the point of view of countries, we can say that the economies of countries where cash is excessive have high liquidity, and the economies of countries where cash is low have low liquidity. For this reason, countries with more cash in international trade always profit more from the trade. The reason for this is the interest rate in favor of cash in futures trading. The economies of countries with high liquidity are more balanced and more vibrant than other countries.
Types Of Liquidity
The concept of liquidity is divided into 2 as real and technical liquidity from a financial point of view.
Real liquidity: refers to the assets and ability that the company or firm can close the debts that it has at the moment of its decision to terminate its operations as soon as possible. For example, a bankrupt factory tries to cover its debts by paying its debts, bills and taxes by cashing in all kinds of tools, equipment and equipment that can be sold together with the cash in its safe at that time.
Technical liquidity: refers to the ability of the company or firm to pay overdue debts with cash in its hand before they are due.
In other words, actual liquidity is based on the bankruptcy or discharge of the company, and technical liquidity is based on the payment of debts before they are due.
Liquidity In The Forex Market
What Is Liquidity? The Forex market, the largest volume market in the world, is also an important type of market where liquidity-based trading can be performed. Because it is a global market, forex is the largest liquid market in the world, as financial investments can be sold instantly at any time. Thanks to the ability to trade 24 hours a day 5 days a week, buyers and sellers can be easily found in the Forex market at any time, and this liquidity activity continues all week. You can learn all the information about Forex trading hours.
Liquidity ratios in investment instruments in the Forex market, which provide investors with good gains in the short term, also naturally vary. For this reason, the investment preference of investors who are experienced in the Forex market is in favor of investment instruments where spread rates are low and liquidity rates are high. Because of the density of transactions in products that already have high liquidity, spread rates are also determined by the market at very low rates.
What Is The Liquidity Trap?
A liquidity trap can be defined as the most extreme point where interest rates cannot fall to lower levels, even if the money supply increases after market interest rates fall to a certain level. In this case, bond prices reach their highest level and monetary policy becomes ineffective. In the case of a liquidity trap, the demand for money is defined as infinitely sensitive to interest.
Naturally, investors do not want to put money into the market out of concern for speculation. The interest rate in the market never falls because bond prices cannot rise further. The only way out of the liquidity trap is to put cash into the market by the government through the method of public spending.