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what is an example of a liquid asset | an example of a liquid asset is money market holdings money market accounts usually do not have hold restrictions or lockup periods i e you are not permitted to sell holdings for a specific period of time in addition the price is broadly communicated across a wide range of buyers and sellers due to usually higher volumes of activity for money market securities it s fairly easy to buy and sell in the open market making the asset liquid and easily convertible to cash | |
why are assets called liquid | assets may be described as liquid to explain that they have fluidity have flexibility and can easily change as opposed more rigid assets that can t be easily exchanged for cash fluid assets can easily change form and be quickly traded | |
is a car a liquid asset | it depends on the car for the most part vehicles in good condition may be desired in the open market prompting a quick sale there s a few things to keep in mind though first the price you offer for your may impacts the liquidity of it you will be more likely to sell your vehicle for less and may find it difficult to find buyers for your top dollar quote second the condition of the car matters better quality assets will usually be more liquid last a car s liquidity depends on the broad car market how are economic conditions and interest rates what is the demand for your specific make model and year is your car rare expensive or custom in which sellers may be disinterested there are many factors to contribute although most cars can generally be sold quickly | |
why are liquid assets important | liquid assets are important because a company consistently needs cash to meet its short term obligations without cash a company can t pay its bills to vendors or wages to employees a company may not always have a lot of cash on hand but it better make sure it has sufficient amounts of liquid assets that can quickly be converted into cash if needed should an immediate need for money arise | |
what is the difference between a liquid asset and illiquid asset | a liquid asset is an item of future economic benefit to a company that can easily be exchanged for cash on the other hand illiquid assets are more difficult to sell consider an office building in downtown new york compared to a single share of stock of amazon the office building may take months to find a buyer engage in negotiations draft legal documentation and finalize the deal on the other hand a single share of stock of publicly traded companies can usually be bought or sold online very quickly the bottom lineto measure how well a company will meet its short term debt obligations a company should be mindful of its liquid assets liquid assets are items that can be quickly converted to cash and companies earning tremendous profit may still face liquidity problems if they don t have the short term resources to pay bills | |
what is a liquid market | a liquid market a one with many available buyers and sellers and comparatively low transaction costs the details of what makes a market liquid may vary depending on the asset being exchanged in a liquid market it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers and the product being exchanged is standardized and in high demand in a liquid market despite daily changes in supply and demand the spread between what the buyer wants to pay and what sellers will offer remains relatively small the opposite of a liquid market is called a thin market or an illiquid market thin markets may have considerably large spreads between the highest available buyer and the lowest available seller understanding liquid marketsliquid markets are usually found in financial assets such as forex futures bonds and stocks markets for high priced tangible goods such as luxury items heavy industrial equipment or houses are considered illiquid markets but even financial securities can also be thinly traded depending on a number of factors including the time of day the immediate conditions of a given market or the relative visibility of the asset the market for the stock of a fortune 500 company would be considered a liquid market but the market for a family owned restaurant would not the largest and most liquid market in the world is the forex market where foreign currencies are traded it is estimated that the daily trading volume in the currency market is over 7 5 trillion which is dominated by the u s dollar the markets for the euro yen pound swiss franc and canadian dollar are also highly liquid futures markets that trade on the major currencies and major stock market indexes are very liquid but futures markets that trade specialized grain or metals products may be much more thinly traded advantages of a liquid marketthe main advantage of a liquid market is that investments can be easily transferred into cash at a good rate and in a timely fashion for example if someone owns 100 000 in u s treasury bills and loses their job the money in these treasuries is easily accessible and the value is known because it is a liquid market however on the other hand real estate property is not so liquid because there may be a small number of buyers for a given house in a given timeframe it may take longer to sell the property the faster you need to sell it the lower the offer you will need to make to sell which means you will receive less money you get for it liquidity and volatilityone significant factor related to liquidity is volatility low liquidity a thinly traded market can generate high volatility when supply or demand changes rapidly conversely sustained high volatility could drive some investors away from a particular market whether it be correlation or causation a market that has less liquidity is likely to become more volatile with less interest any shift in prices is exasperated as participants have to cross wider spreads which in turn shifts prices further good examples are lightly traded commodity markets such as grains corn and wheat futures | |
what is liquidating | the term liquidate means converting property or assets into cash or cash equivalents by selling them on the open market liquidation similarly refers to the process of bringing a business to an end and distributing its assets to claimants liquidation of assets may be either voluntary or forced voluntary liquidation may be enacted to raise the cash needed for new investments or purchases or to close out old positions a forced liquidation may be used in bankruptcy procedures in which an entity chooses or is forced by a legal judgment or contract to turn assets into a liquid form i e cash liquidation can also refer to the process of selling off inventory usually at steep discounts it is not always necessary to file for bankruptcy to liquidate inventory as a company may elect to do so to make way for newer items understanding liquidationin investing liquidation occurs when an investor closes their position in an asset liquidating an asset is usually carried out when an investor or portfolio manager needs cash to reallocate funds or rebalance a portfolio an asset that is not performing well may also be partially or fully liquidated an investor who needs cash for other non investment obligations such as paying bills vacation expenses buying a car covering tuition etc may opt to liquidate their assets financial advisors tasked with allocating assets to a portfolio usually consider among other factors why someone wants to invest and for how long an investor who wants to buy a home within five years may hold a portfolio of stocks and bonds designed to be liquidated in five years the cash proceeds would then be used to make a down payment for a home the financial advisor would keep that five year deadline in mind when selecting investments likely to appreciate and protect the capital for the investor margin callsbrokers may force certain customers to liquidate holdings in the event of an unmet margin call this is a request for additional funds that occurs when the value of a margin account falls below a certain threshold required by their broker due to investment losses if a margin call is not met a broker may liquidate any open positions to bring the account back up to the minimum value they may be able to do this without the investor s approval this effectively means that the broker has the right to sell any stock holdings in the requisite amounts without letting the investor know furthermore the broker may also charge an investor a commission on these transaction s this investor is held responsible for any losses sustained during this process | |
when companies liquidate assets | while businesses can liquidate assets to free up cash even in the absence of financial hardship asset liquidation in the business world is mostly done as part of a bankruptcy procedure when a company fails to repay creditors due to financial hardship a bankruptcy court may order a compulsory liquidation of assets if the company is found to be insolvent the secured creditors would take over the assets that were pledged as collateral before the loan was approved the unsecured creditors would be paid off with the remaining cash from liquidation if any funds are left after settling all creditors the shareholders will be paid according to the proportion of shares that each holds with the insolvent company not all liquidation is the result of insolvency a company may undergo a voluntary liquidation which occurs when shareholders elect to wind down the company the petition for voluntary liquidation is filed by shareholders when it is believed that the company has achieved its goals and purpose the shareholders appoint a liquidator who dissolves the company by collecting the assets of the solvent company liquidating the assets and distributing the proceeds to employees who are owed wages and to creditors in order of priority any cash that remains is then distributed to preferred shareholders before common shareholders get a cut chapter 7 of the u s bankruptcy code governs liquidation proceedings solvent companies may also file for chapter 7 but this is uncommon | |
what does it mean to liquidate a company | to liquidate a company is when it sells off all of the assets on its balance sheet to pay off debts and obligations in order to dissolve the company it is the process of winding down a company s affairs and distributing any remaining assets to the company s creditors and shareholders if anything remains liquidation may be the best option for a company if it is no longer able to meet its financial obligations if it has a large amount of debt that cannot be paid off or if it is insolvent it may also be the best option if the business is no longer profitable and there are no prospects for turning it around as through a chapter 7 bankruptcy proceeding | |
why might an individual liquidate assets | liquidating personal assets involves selling off items such as property stocks and bonds collectibles and personal belongings to pay off debts or generate cash it is a way of raising money quickly to meet financial obligations an individual might need to liquidate their assets if they are facing financial difficulties such as mounting debts job loss or unexpected large bills like emergency medical expenses liquidation may also be necessary in the event of a divorce settlement or the need to fund a large purchase such as a home s down payment or for a business individuals may also be forced to liquidate securities held in a brokerage account if a margin call cannot be satisfied | |
where did the word liquidate come from | the term liquidate has been in use in some form or another since the 16th century and has been used in various contexts over time the word comes from the latin word liquidus which means to melt or make clear 1the term was later adopted by legal and financial professionals to refer to the process of quickly settling debts selling assets and distributing proceeds in this context liquidate refers to the conversion of assets into cash which can then be used to pay off debts or distribute to shareholders the bottom lineto liquidate is to sell assets for cash often quickly liquidation may be voluntary to increase one s cash position or remove risk or forced such as by a margin call in a brokerage account or by a bankruptcy judge in the case of insolvency the word liquidation comes from the fact that cash by definition is the most liquid asset that exists in case a company experiences chapter 7 bankruptcy its assets will be liquidated and the company will cease to exist leaving its shareholders with cents on the dollar if anything | |
what are liquidated damages | liquidated damages lds are a sum of money specified in some contracts that are to be paid by one party to another as compensation for intangible losses liquidated damages are to be paid only if one of the parties to the contract is found to be in breach of contract the liquidated damages clause covers events such as a missed deadline or a leaked company secret the damage is real but a precise dollar loss is difficult to pin down instead both parties to the contract settle on a number that reflects the importance of meeting the terms of the contract understanding liquidated damagesliquidated damages are meant as a fair representation of losses in situations where actual damages are difficult to ascertain in general liquidated damages are designed to be fair rather than punitive liquidated damages may be referred to in a specific contract clause to cover circumstances where a party faces a loss from assets that do not have a direct monetary correlation for instance if a party in a contract were to leak supply chain pricing information that is vital to a business this could fall under liquidated damages example of liquidated damagesliquidated damages provide compensation for losses that are difficult to measure with any degree of accuracy for example an agreement to purchase a home might include a clause that requires the buyer to forfeit the deposit if the deal fails to go through alternatively a contract between two companies might include liquidation damages if trade secrets or other confidential company information is improperly shared one common example of a liquidated damages clause appears in contracts between a company and its outside suppliers and consultants for a new product the product design and the marketing plan don t have a set market value but the company s bottom line could suffer if they are leaked to a competitor the liquidated damages clause allows the company to collect some compensation special considerationsthe courts do not always enforce liquidated damages clauses it may reject the clause if the monetary amount cited is extraordinarily disproportional to the real effects of the breach of contract such limitations prevent a plaintiff from attempting to claim an exorbitant amount from a defendant for instance a plaintiff might not be able to claim liquidated damages that amount to multiples of its gross revenue if the breach affected only a portion of its operations the courts typically require that the parties involved make the most reasonable assessment possible for the liquidated damages clause at the time the contract is signed this provides a shared understanding of what is at stake if that aspect of the contract is breached a liquidated damages clause can also give the parties involved a basis to negotiate for an out of court settlement the concept of liquidated damages is framed around compensation for some harm and injury to the party rather than a fine imposed on the defendant | |
how do liquidated damages differ from a penalty clause | a liquidated damages clause is designed to allow a party to a contract to recover a loss a penalty clause is punitive it is intended as punishment | |
what are unliquidated damages | unliquidated damages are similar to liquidated damages both seek to compensate a harmed party for a breach of contract the amount of unliquidated damages however is not specified in the contract as is the case for liquidated damages | |
what are the types of damages in the legal context | there are three general types of compensatory damages that the plaintiff can seek and which may be awarded by a court the bottom linea liquidated damages clause is fairly common in contracts when one party has concerns about the possibility of losses caused by errors or misjudgments by the other party these losses are by their nature difficult to estimate they may be related to loss of potential sales loss of reputation or loss of competitive edge in any case the number attached to a liquidated damages clause creates a shared understanding between the parties to a contract of the value of meeting the contract terms | |
what is a liquidating dividend | a liquidating dividend is a type of payment that a corporation makes to its shareholders during a partial or full liquidation for the most part this form of distribution is made from the company s capital base as a return of capital this distribution is typically not taxable for shareholders a liquidating dividend is distinguished from regular dividends that are issued from the company s operating profits or retained earnings a liquidating dividend is also called liquidating distribution breaking down liquidating dividenda liquidating dividend may be made in one or more installments in the united states a corporation paying out liquidating dividends will issue a form 1099 div to all of its shareholders that details the amount of the distribution despite certain tax advantages investors who receive liquidation dividends often find that these still do not cover their initial investment as the company s fundamental quality has deteriorated liquidating dividend and traditional dividendsin general with regular dividends on and after the ex dividend date a seller is still entitled to the payout even if she he has already sold it to a buyer essentially a person who owns the security on the ex dividend date will receive the distribution regardless of who currently holds the stock the ex dividend date is typically set for two business days prior to the record date this is due to the t 3 system of settlement financial markets presently use in north america for a regular dividend the declaration date or announcement date is when a company s board of directors announces a distribution the payment date is when the company officially mails the dividend checks or credits them to investor accounts liquidating dividend and liquidation preferencein addition to a liquidating dividend companies have a set order in which they must re pay their owners in the event of a liquidation liquidation can occur when a company is insolvent and cannot pay its obligations when they come due among other reasons as company operations end remaining assets go to existing creditors and shareholders each of these parties has a priority in the order of claims to company assets the most senior claims belong to secured creditors followed by unsecured creditors including bondholders the government if the company owes taxes and employees if the company owes them unpaid wages or other obligations preferred and common shareholders receive any remaining assets respectively | |
what is liquidation | liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants it is an event that usually occurs when a company is insolvent meaning it cannot pay its obligations when they are due as company operations end the remaining assets are used to pay creditors and shareholders based on the priority of their claims general partners are subject to liquidation the term liquidation may also be used to refer to the selling of poor performing goods at a price lower than the cost to the business or at a price lower than the business desires investopedia paige mclaughlin | |
how liquidation works | chapter 7 of the u s bankruptcy code governs liquidation proceedings solvent companies may also file for chapter 7 but this is uncommon not all bankruptcies involve liquidation chapter 11 for example involves rehabilitating the bankrupt company and restructuring its debts in chapter 11 bankruptcy the company will continue to exist after any obsolete inventory is liquidated after underperforming branches close and after relevant debts are restructured 12unlike when individuals file for chapter 7 bankruptcy business debts still exist after chapter 11 bankruptcy the debt will remain until the statute of limitations has expired and as there is no longer a debtor to pay what is owed the debt must be written off by the creditor 2distribution of assets during liquidationassets are distributed based on the priority of various parties claims with a trustee appointed by the u s department of justice overseeing the process the most senior claims belong to secured creditors who have collateral on loans to the business these lenders will seize the collateral and sell it often at a significant discount due to the short time frames involved if that does not cover the debt they will recoup the balance from the company s remaining liquid assets if any 3next in line are unsecured creditors these include bondholders the government if it is owed taxes and employees if they are owed unpaid wages or other obligations 3finally shareholders receive any remaining assets in the unlikely event that there are any in such cases investors in preferred stock have priority over holders of common stock liquidation can also refer to the process of selling off inventory usually at steep discounts it is not necessary to file for bankruptcy to liquidate inventory 34liquidation of securitiesliquidation can also refer to the act of exiting a securities position in the simplest terms this means selling the position for cash another approach is to take an equal but opposite position in the same security for example by shorting the same number of shares that make up a long position in a stock a broker may forcibly liquidate a trader s positions if the trader s portfolio has fallen below the margin requirement or they have demonstrated a reckless approach to risk taking example of liquidationcompany abc has been in business for 10 years and has been generating profits throughout its run in the last year however the business has struggled financially due to a downturn in the economy it has reached a point where abc can no longer pay any of its debts or cover any of its expenses such as payments to its suppliers abc has decided that it will close up shop and liquidate its business it enters into chapter 7 bankruptcy and its assets are sold off these include a warehouse trucks and machinery with a total value of 5 million currently abc owes 3 5 million to its creditors and 1 million to its suppliers the sale of its assets during the liquidation process will cover its obligations | |
what is the liquidation of a company | the liquidation of a company happens when company assets are sold when it can no longer meet its financial obligations sometimes the company ceases operations entirely and is deregistered the assets are sold to pay back various claimants such as creditors and shareholders not all assets will sell at 100 of their value so the business and bankruptcy courts will determine an estimated recovery value of the property to distribute to creditors | |
what does it mean to liquidate money | to liquidate means to convert assets into cash for example a person may sell their home car or other asset and receive cash for doing so this is known as liquidation many assets are assessed based on how liquid they are for example a home is not very liquid because it takes time to sell a house which involves getting it ready for sale assessing the value putting it up for sale and finding a buyer on the other hand stocks are more liquid as they can be easily sold and cash received from the sale if they have appreciated | |
is a company dissolved after liquidation | no a company is not dissolved after liquidation dissolving a company and liquidating it are two separate procedures liquidating a company means selling off its assets to claimants whereas dissolving a company is deregistering it the bottom line | |
when a company becomes insolvent meaning that it can no longer meet its financial obligations it undergoes liquidation liquidation is the process of closing a business and distributing its assets to claimants | the sale of assets is used to pay creditors and shareholders in the order of priority liquidation is also used to refer to the act of exiting a securities position usually by selling the position for cash | |
what is liquidation margin | buying securities on margin allows a trader to acquire more shares than can be purchased on a cash only basis if the stock price goes up earnings are often higher because an investor holds more shares however if the stock price falls traders may lose more than their initial investment the liquidation margin is the value of all of the positions in a margin account including cash deposits and the market value of its open long and short positions if a trader allows their liquidation margin to become too low they may be faced with margin calls from their brokers and the broker may liquidate those positions 1understanding liquidation marginsmargin trading is the practice of borrowing money from a broker to execute leveraged transactions such as buying securities leveraged trading involves borrowing the securities themselves from the broker s inventory when engaging in short selling the trader then sells those securities and seeks to repurchase them at a lower price in the future | |
when using margin trading an investor must ensure that the total value of the margin account does not drop below a certain level the value of the account based on market prices is known as the liquidation margin | consider a scenario where a trader makes a series of leveraged stock purchases if the purchases begin to generate losses the liquidation margin of the account will decline if the decline continues it will eventually reach the point where the broker has the right to initiate a margin call a margin call effectively forces the trader to provide additional collateral for the account to reduce its risk level typically this collateral consists of depositing more cash in the brokerage account which becomes part of the liquidation margin raising the margin level above the required threshold types of liquidation marginsif an investor or trader holds a long position the liquidation margin is equal to what the investor or trader would retain if the position were closed if a trader has a short position the liquidation margin is equal to what the trader would owe to purchase the security example of a liquidation marginsarah is a margin trader who invested 10 000 in a single stock using 100 leverage assuming sarah paid the required margin interest or the loan rate between broker and investor and used a 2 1 leverage the stock increased in value and she holds 20 000 worth of stock since the initial liquidation margin is only 10 000 10 000 is what sarah would receive if the account were closed suppose that sarah s stock performed poorly and fell 25 since sarah was initially using 2 1 leverage that means she lost 50 of her original investment sarah s account now has a liquidation margin of just 5 000 but she commands 15 000 worth of stock | |
when the equity in a margin account falls below the brokerage requirements most firms will issue a margin call when this happens action is required to increase the equity in an account by depositing cash or by selling securities however selling a position the following business day would create a margin liquidation violation | a margin liquidation violation occurs when a margin account has been issued both a federal reserve and an exchange call and you delay selling securities instead of depositing cash to cover the calls 2 | |
what does liquidation mean | liquidation is defined as converting assets into cash or liquid assets | |
what happens when margin is liquidated | if an investor receives a margin call but is unable to come up with the funds to satisfy it the broker may be forced to sell the traders holding until the value of the margin call has been satisfied | |
what is margin liquidation level | the level at which the liquidation margin is reached will vary between brokerages and may depend on the type of assets held in an account more risky assets for example may have a more strict liquidation margin investment firms detail their requirements on their websites and brokerages often provide tools on their websites like fidelity investments margin calculator | |
what is a liquidation preference | a liquidation preference is a clause in a contract that dictates the payout order in case of a corporate liquidation typically the company s investors or preferred stockholders get their money back first ahead of other kinds of stockholders or debtholders in the event that the company must be liquidated liquidation preferences are frequently used in venture capital contracts hybrid debt instruments promissory notes and other structured private capital transactions to clarify what investors get paid and in which order during a liquidation event such as the sale of the company understanding liquidation preferenceliquidation preference in its broadest sense determines who gets how much when a company is liquidated sold or goes bankrupt to come to this conclusion the company s liquidator must analyze the company s secured and unsecured loan agreements as well as the definition of the share capital both preferred and common stock in the company s articles of association as a result of this process the liquidator is then able to rank all creditors and shareholders and distribute funds accordingly liquidation preference determines who gets their money first when a company is sold and how much money they are entitled to get the use of specific liquidation preference dispositions is popular when venture capital firms invest in startup companies the investors often make it a condition for their investment that they receive liquidation preference over other shareholders this protects venture capitalists from losing money by making sure they get their initial investments back before other parties in these cases there does not need to be an actual liquidation or bankruptcy of a company in venture capital contracts a sale of the company is often deemed to be a liquidation event as such if the company is sold at a profit liquidation preference can also help venture capitalists be first in line to claim part of the profits venture capitalists are usually repaid before holders of common stock and before the company s original owners and employees in many cases the venture capital firm is also a common shareholder liquidation preference examplefor example assume a venture capital company invests 1 million in a startup in exchange for 50 of the common stock and 500 000 of preferred stock with liquidation preference assume also that the founders of the company invest 500 000 for the other 50 of the common stock if the company is then sold for 3 million the venture capital investors receive 2 million being their preferred 1 million and 50 of the remainder while the founders receive 1 million conversely if the company sells for 1 million the venture capital firm receives 1 million and the founders receive nothing more generally liquidation preference can also refer to the repayment of creditors such as bondholders before shareholders if a company goes bankrupt in such a case the liquidator sells its assets then uses that money to repay senior creditors first then junior creditors then shareholders in the same way creditors holding liens on specific assets such as a mortgage on a building have a liquidation preference over other creditors in terms of the proceeds of sale from the building | |
how does liquidation preference work | liquidation preference determines who gets how much when a company is liquidated sold or goes bankrupt the company s liquidator analyzes the business s secured and unsecured loan agreements as well as the definition of the share capital both preferred and common stock in the company s articles of association | |
how does liquidation preference apply to venture capital | venture capital investors often make it a condition for their investment in a startup company that they receive liquidation preference over other shareholders this ensures that venture capitalists will get their initial investments back before other parties | |
how does liquidation preference apply to startup companies | there does not need to be an actual liquidation or bankruptcy of a startup company for liquidation preference to apply in venture capital contracts a sale of the company is often deemed to be a liquidation event if the company is then sold at a profit liquidation preference can also help venture capitalists be first in line to claim their share of the profits the bottom lineliquidation preference is a contract clause that determines who gets paid first and how much gets paid when a company must be liquidated e g selling the company venture capitalists are an example of investors or preferred shareholders who are usually paid back first ahead of holders of common stock and debt | |
what is liquidation value | liquidation value is the net value of a company s physical assets if it were to go out of business and the assets sold the liquidation value is the value of company real estate fixtures equipment and inventory intangible assets are excluded from a company s liquidation value understanding liquidation valuethere are generally four levels of valuation for business assets market value book value liquidation value and salvage value each level of value provides a way for accountants and analysts to classify the aggregate value of assets liquidation value is especially important in the case of bankruptcies and workouts liquidation value does not include intangible assets such as a company s intellectual property goodwill and brand recognition however if a company is sold rather than liquidated both the liquidation value and intangible assets determine the company s going concern value value investors look at the difference between a company s market capitalization and its going concern value to determine whether the company s stock is currently a good buy not every asset can be sold for what was paid for it or what is still due on the note to buy that asset businesses look at the recovery rate on an asset by asset basis cash would have a 100 recovery rate accounts receivable inventory and plant equipment would have a lower recovery rate these rates tallied together will provide an estimated recovery value of a company in case of liquidation potential investors will assess the liquidation value of a company before investing investors want to know how much of their funds would be returned in the event of bankruptcy market vs book vs liquidation vs salvagemarket value typically provides the highest valuation of assets although the measure could be lower than book value if the value of the assets has decreased due to market demand rather than business use the book value is the value of the asset as listed on the balance sheet the balance sheet lists assets at the historical cost so the value of assets may be higher or lower than market prices in an economic environment with rising prices the book value of assets is lower than the market value the liquidation value is the expected value of the asset once it has been liquidated or sold presumably at a loss to historical cost finally the salvage value is the value given to an asset at the end of its useful life in other words this is the scrap value liquidation value is usually lower than book value but greater than salvage value the assets continue to have value but they are sold at a loss because they must be sold quickly discount footwear company payless filed for bankruptcy in february 2019 despite once owning 3 400 outlets in 40 countries the company announced it would close all of its u s and puerto rico locations example of a liquidationliquidation is the difference between some value of tangible assets and liabilities as an example assume liabilities for company a are 550 000 also assume the book value of assets found on the balance sheet is 1 million the salvage value is 50 000 and the estimated value of selling all assets at auction is 750 000 or 75 cents on the dollar the liquidation value is calculated by subtracting the liabilities from the auction value which is 750 000 minus 550 000 or 200 000 | |
what is a liquidator | a liquidator is a person or entity that liquidates something a liquidator is specially appointed to act on behalf of a company in various capacities they are legally empowered to wind up a company s affairs when it is closing typically when the company is going bankrupt when things get to this point the liquidator may represent companies in lawsuits or sell off their assets for cash or equivalents the resulting funds are used to pay off the company s debts liquidators may also defend companies in lawsuitsunderstanding liquidatorsa liquidator is a person with the legal authority to act on behalf of a company before it closes are generally assigned by the court unsecured creditors or the company s shareholders they often step in when a company declares bankruptcy their primary function is to generate cash for a variety of reasons including debt repayment a liquidator has several key responsibilities the first is to take control of the organization s assets which are pooled together and sold off individually cash from the sale proceeds is then used to pay off the outstanding debt held by unsecured creditors another key function of liquidators is to bring and defend lawsuits other actions include collecting outstanding receivables paying off bills and debts and finishing other corporate termination procedures a liquidator s authority or power is defined by the laws where the role is assigned they may be granted complete authority over all business matters until the assets are sold and the debts are all paid off while others are granted liberties while under the court s supervision the liquidator has a fiduciary and legal responsibility to all parties involved the company court and creditors considered the go to person when it comes to making any decisions about the company and its assets the liquidator must keep them under their control to ensure they are properly valued and dispersed after being sold the liquidator issues any correspondence and holds meetings with the company and its creditors to ensure the liquidation process goes through smoothly chapter 7 of the u s bankruptcy code governs liquidation proceedings solvent companies may also file for chapter 7 but this is uncommon liquidators and the liquidation processmany retailers go through the liquidation process under a liquidator to dispose of their assets because of a looming bankruptcy the liquidator assesses the business and its assets and may decide when and how to sell them new inventory shipments are stopped and the liquidator may plan for sales of the current stock everything under the retailer s banner including fixtures real estate and other assets is sold the liquidator organizes the proceeds and pays off the creditors liquidators are not only assigned to retailers other businesses that face trouble may require a liquidator they may be required to deal with issues after a merger takes place when one company buys out another for instance when a merger takes place one company s information technology department may become redundant the liquidator may be assigned to sell off or divide the assets of one becoming liquidatorliquidators typically have a degree or background in finance and or accounting this allows them to review and file financial reports and other key documents such as tax returns they can also use their academic and professional experience to help them value assets these professionals must also possess the following skills since they have a fiduciary responsibility liquidators must also act ethically and responsibly to ensure they follow regulations and meet the needs of the company | |
how liquidators are paid | liquidators charge fees for their services this cost varies depending on the size of the business the complexity of the case and the time needed to complete the job the insolvency act 1986 specifies the absolute priority also known as the liquidation preference with which stakeholders are repaid in the event of a bankruptcy or liquidation according to the law liquidators are always paid first payments are then made to senior secured creditors unsecured and subordinated creditors and preferred shareholders common shareholders are generally the last creditors who are paid during the liquidation process in some jurisdictions a liquidator may also be named as a trustee as in a bankruptcy trustee real world example of liquidatorsthere are many examples of liquidators taking charge of company affairs this occurred with shoe retailer payless saddled with debt the company filed for chapter 11 in 2017 with plans to liquidate almost every store it owned in the united states and canada 1although payless managed to restructure and survive that period it wasn t fully out of the lurch it filed for bankruptcy again in february 2019 saying it would close all of its retail locations across north america which amounted to about 2 100 stores the company ended up selling its merchandise at a discount to consumers 2 | |
are liquidators always part of the liquidation process | no liquidators aren t always part of the liquidation process a voluntary liquidation is a self imposed wind up and dissolution of a company that has been approved by its shareholders such a decision will happen once a company s leadership decides that the company has no reason to continue operating in some cases the company may decide to undertake the process on its own | |
what is a liquidation sale | companies may also engage in liquidation sales to reduce costly inventory at rock bottom prices it isn t uncommon to see a retailer advertising a liquidation sale selling off as much if not all of their stock often at a deep discount to consumers in some cases this may be due to insolvency but don t always do this because they re closing down some stores do this to get rid of and replace the older stock with new inventory who pays for a liquidator the liquidator s fees and expenses are covered by the company s assets after they have been sold off in the absence of cash or an asset sale the liquidator is paid using money from shareholders or the company s directors 34the bottom lineliquidators step in when companies are in financial distress usually when they re about to go bankrupt assigned by the court creditors or shareholders this individual is responsible for taking charge of a company s assets selling them off and paying its creditors in other cases they may bring legal claims or defend companies in lawsuits because they have a fiduciary responsibility liquidators must act in the best interests of the company court creditors and shareholders | |
what is liquidity | liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price the most liquid asset of all is cash itself consequently the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently the more liquid an asset is the easier and more efficient it is to turn it back into cash less liquid assets take more time and may have a higher cost tara anand investopediaunderstanding liquidityin other words liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value cash is universally considered the most liquid asset because it can most quickly and easily be converted into other assets tangible assets such as real estate fine art and collectibles are all relatively illiquid other financial assets ranging from equities to partnership units fall at various places on the liquidity spectrum for example if a person wants a 1 000 refrigerator cash is the asset that can most easily be used to obtain it if that person has no cash but a rare book collection that has been appraised at 1 000 they are unlikely to find someone willing to trade the refrigerator for their collection instead they will have to sell the collection and use the cash to purchase the refrigerator that may be fine if the person can wait for months or years to make the purchase but it could present a problem if the person has only a few days they may have to sell the books at a discount instead of waiting for a buyer who is willing to pay the full value rare books are an example of an illiquid asset there are two main measures of liquidity market liquidity and accounting liquidity market liquidity refers to the extent to which a market such as a country s stock market or a city s real estate market allows assets to be bought and sold at stable transparent prices in the example above the market for refrigerators in exchange for rare books is so illiquid that it does not exist the stock market on the other hand is characterized by higher market liquidity if an exchange has a high volume of trade that is not dominated by selling the price that a buyer offers per share the bid price and the price that the seller is willing to accept the ask price will be fairly close to each other investors then will not have to give up unrealized gains for a quick sale when the spread between the bid and ask prices tightens the market is more liquid when it grows the market instead becomes more illiquid markets for real estate are usually far less liquid than stock markets the liquidity of markets for other assets such as derivatives contracts currencies or commodities often depends on their size and how many open exchanges exist for them to be traded on accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them the ability to pay off debts as they come due in the example above the rare book collector s assets are relatively illiquid and would probably not be worth their full value of 1 000 in a pinch in investment terms assessing accounting liquidity means comparing liquid assets to current liabilities or financial obligations that come due within one year there are several ratios that measure accounting liquidity which differ in how strictly they define liquid assets analysts and investors use these to identify companies with strong liquidity it is also considered a measure of depth measuring liquidityfinancial analysts look at a firm s ability to use liquid assets to cover its short term obligations generally when using these formulas a ratio greater than one is desirable the current ratio is the simplest and least strict it measures current assets those that can reasonably be converted to cash in one year against current liabilities its formula would be the quick ratio or acid test ratio is slightly more strict it excludes inventories and other current assets which are not as liquid as cash and cash equivalents accounts receivable and short term investments the formula is a variation of the quick acid test ratio simply subtracts inventory from current assets making it a bit more generous the cash ratio is the most exacting of the liquidity ratios excluding accounts receivable as well as inventories and other current assets it defines liquid assets strictly as cash or cash equivalents more than the current ratio or acid test ratio the cash ratio assesses an entity s ability to stay solvent in case of an emergency the worst case scenario on the grounds that even highly profitable companies can run into trouble if they do not have the liquidity to react to unforeseen events its formula is liquidity examplein terms of investments equities as a class are among the most liquid assets but not all equities or other fungible securities are created equal when it comes to liquidity some options and stocks trade more actively than others on stock exchanges more activity means that there is more of a market for them in other words they attract greater more consistent interest from traders and investors in addition to trading volume other factors such as the width of bid ask spreads market depth and order book data can provide further insight into the liquidity of a stock so while volume is an important factor to consider when evaluating liquidity it should not be relied upon exclusively these liquid stocks are usually identifiable by their daily volume which can be in the millions or even hundreds of millions of shares when a stock has high volume it means that there are a large number of buyers and sellers in the market which makes it easier for investors to buy or sell the stock without significantly affecting its price on the other hand low volume stocks may be harder to buy or sell as there may be fewer market participants and therefore less liquidity for example on march 13 2023 69 6 million shares of amazon com inc amzn traded on exchanges by comparison intel corp intc saw a volume of just 48 1 million shares indicating it was somewhat less liquid but ford motor co f had a volume of 118 5 million shares making it the most active and presumably most liquid among these three stocks on that day | |
why is liquidity important | if markets are not liquid it becomes difficult to sell or convert assets or securities into cash you may for instance own a very rare and valuable family heirloom appraised at 150 000 however if there is not a market i e no buyers for your object then it is irrelevant since nobody will pay anywhere close to its appraised value it is very illiquid it may even require hiring an auction house to act as a broker and track down potentially interested parties which will take time and incur costs liquid assets however can be easily and quickly sold for their full value and with little cost companies also must hold enough liquid assets to cover their short term obligations like bills or payroll otherwise they could face a liquidity crisis which could lead to bankruptcy | |
what are the most liquid assets or securities | cash is the most liquid asset followed by cash equivalents which are things like money market accounts certificates of deposit cds or time deposits marketable securities such as stocks and bonds listed on exchanges are often very liquid and can be sold quickly via a broker gold coins and certain collectibles may also be readily sold for cash | |
what are some illiquid assets or securities | securities that are traded over the counter otc such as certain complex derivatives are often quite illiquid for individuals a home a time share or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer and several more weeks to finalize the transaction and receive payment moreover broker fees tend to be quite large e g 5 to 7 on average for a real estate agent | |
why are some stocks more liquid than others | the most liquid stocks tend to be those with a great deal of interest from various market actors and a lot of daily transaction volume such stocks will also attract a larger number of market makers who maintain a tighter two sided market illiquid stocks have wider bid ask spreads and less market depth these names tend to be lesser known have lower trading volume and often have lower market value and volatility thus the stock for a large multinational bank will tend to be more liquid than that of a small regional bank the bottom lineliquidity is the ease of converting an asset or security into cash with cash itself being the most liquid asset of all other liquid assets include stocks bonds and other exchange traded securities tangible items tend to be less liquid meaning that it can take more time effort and cost to sell them e g a home market liquidity and accounting liquidity are two main classifications of liquidity and financial analysts use various ratios such as the current ratio quick ratio acid test ratio and cash ratio to measure it having liquidity is important for individuals and firms to pay off their short term debts and obligations and avoid a liquidity crisis | |
what is a liquidity adjustment facility | a liquidity adjustment facility laf is a tool used in monetary policy primarily by the reserve bank of india rbi that allows banks to borrow money through repurchase agreements repos or to make loans to the rbi through reverse repo agreements this arrangement is effective in managing liquidity pressures and assuring basic stability in the financial markets in the united states the federal reserve transacts repos and reverse repos under its open market operations the rbi introduced the laf as a result of the narasimham committee on banking sector reforms 1998 basics of a liquidity adjustment facilityliquidity adjustment facilities are used to aid banks in resolving any short term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control various banks use eligible securities as collateral through a repo agreement and use the funds to alleviate their short term requirements thus remaining stable the facilities are implemented on a day to day basis as banks and other financial institutions ensure they have enough capital in the overnight market the transacting of liquidity adjustment facilities takes place via an auction at a set time of the day an entity wishing to raise capital to fulfill a shortfall engages in repo agreements while one with excess capital does the opposite and executes a reverse repo liquidity adjustment facility and the economythe rbi can use the liquidity adjustment facility to manage high levels of inflation it does so by increasing the repo rate which raises the cost of servicing debt this in turn reduces investment and money supply in india s economy conversely if the rbi is trying to stimulate the economy after a period of slow economic growth it can lower the repo rate to encourage businesses to borrow thus increasing the money supply recently the rbi cut the repo rate by 40 basis points in may 2020 to 4 00 from 4 40 previously due to weak economic activity benign inflation and slower global growth at the same time the reverse repo rate was cut to 3 35 from 3 75 also a decline of 40 basis points liquidity adjustment facility examplelet s assume a bank has a short term cash shortage due to a recession gripping the indian economy the bank would use the rbi s liquidity adjustment facility by executing a repo agreement by selling government securities to the rbi in return for a loan with an agreement to repurchase those securities for example say the bank needs a one day loan for 50 000 000 indian rupees and executes a repo agreement at 6 25 the bank s payable interest on the loan is 8 561 64 50 000 000 x 6 25 365 now let s suppose the economy is expanding and a bank has excess cash on hand in this case the bank would execute a reverse repo agreement by making a loan to the rbi in exchange for government securities in which it agrees to repurchase those securities for example the bank may have 25 000 000 available to loan the rbi and decide to execute a one day reverse repo agreement at 6 the bank would receive 4109 59 in interest from the rbi 25 000 000 x 6 365 | |
what is the liquidity coverage ratio lcr | the liquidity coverage ratio lcr refers to the proportion of highly liquid assets that financial institutions must hold to ensure that they can meet their short term obligations and ride out any disruptions in the market it is mandated by international banking agreements known as the basel accords understanding the liquidity coverage ratio lcr the liquidity coverage ratio lcr is a product of the basel accords a series of regulations developed by the basel committee on banking supervision bcbs the bcbs is a group of 45 representatives from major global financial centers 2 one of its roles is to set standards that will maintain the solvency of the worldwide banking system no matter what stresses the system encounters as part of that banks are required to hold enough high quality liquid assets to fund cash outflows for 30 days 1 high quality liquid assets include only those that can be converted easily and quickly into cash the three categories of liquid assets with decreasing levels of quality are level 1 level 2a and level 2b thirty days was chosen in the belief that in the event of a serious a financial crisis governments and central banks such as the federal reserve bank in the u s would most likely step in to rescue and stabilize the financial system within that time frame having a 30 day cushion of cash would theoretically enable the banks to survive a bank run until that happened under basel iii level 1 assets are not discounted when calculating the lcr while level 2a and level 2b assets have a 15 and a 25 50 discount respectively level 1 assets include federal reserve bank balances foreign resources that can be withdrawn quickly securities issued or guaranteed by specific sovereign entities and u s government issued or guaranteed securities 3level 2a assets include securities issued or guaranteed by specific multilateral development banks or sovereign entities and securities issued by u s government sponsored enterprises level 2b assets include publicly traded common stock and investment grade corporate debt securities issued by nonfinancial sector corporations | |
how to calculate the lcr | calculating lcr is as follows l c r high quality liquid asset amount hqla total net cash flow amount lcr frac text high quality liquid asset amount hqla text total net cash flow amount lcr total net cash flow amounthigh quality liquid asset amount hqla for example let s assume bank abc has high quality liquid assets worth 55 million and 35 million in anticipated net cash flows over a 30 day stress period in this case the bank s lcr is 55 million 35 million that works out to 157 which meets the requirement under basel iii implementation of the lcrthe lcr was proposed in 2010 followed by revisions and final approval in 2014 its implementation was then phased in with the full 100 minimum not required until 2019 4in the united states the 100 lcr rule applies only to banking institutions with more than 250 billion in total consolidated assets 5lcr vs other liquidity ratiosliquidity ratios of various kinds are used not only in bank regulation but throughout the business and financial world typically as a measure of a company s ability to pay off its current debt obligations without raising external capital well known examples include the current ratio quick ratio and operating cash flow ratio limitations of the lcra limitation of the lcr is that it requires banks to hold more cash than they might otherwise and as a consequence lend out less money to businesses and individual consumers one could argue that if banks issue fewer loans it could lead to slower economic growth since companies often need access to debt in order to fund their operations and expand similarly consumers would conceivably purchase fewer cars appliances and other products which they often borrow money to pay for another limitation is that we won t know until the next major financial crisis if the lcr provides enough of a financial cushion for banks until other institutions come to their rescue | |
what are the basel accords | the basel accords are a series of three sequential banking regulation agreements basel i ii and iii set by the basel committee on bank supervision bcbs the bcbs is a group of 45 representatives from major global financial centers the committee provides recommendations on banking and financial regulations specifically concerning capital risk market risk and operational risk the accords ensure that financial institutions have enough capital on account to absorb unexpected losses the liquidity coverage ratio lcr is a chief takeaway from the basel iii accord | |
what are some limitations of the lcr | a limitation of the lcr is that it requires banks to hold more cash and might lead to fewer loans made to consumers and businesses which could result in slower economic growth from the banks perspective having to keep more cash in reserve and make fewer loans can hamper profits | |
what is the lcr for a sifi | a systemically important financial institution sifi is a bank insurance company or other financial institution that u s federal regulators determine would pose a serious risk to the economy if it were to collapse currently these are defined as institutions that have more than 250 billion in assets they are required to maintain a 100 lcr and also subject to other more stringent regulatory requirements the bottom linethe liquidity coverage ratio lcr is a measure intended to force financial institutions to set aside enough highly liquid capital to get them through the early stages of a financial crisis if successful that could prevent the crisis from spreading and causing greater economic harm | |
what is a liquidity crisis | a liquidity crisis is a financial situation characterized by a lack of cash or easily convertible to cash assets on hand across many businesses or financial institutions simultaneously in a liquidity crisis liquidity problems at individual institutions lead to an acute increase in demand and decrease in supply of liquidity and the resulting lack of available liquidity can lead to widespread defaults and even bankruptcies understanding a liquidity crisismaturity mismatching between assets and liabilities as well as a resulting lack of properly timed cash flow are typically at the root of a liquidity crisis liquidity problems can occur at a single institution but a true liquidity crisis usually refers to a simultaneous lack of liquidity across many institutions or an entire financial system single business liquidity problem | |
when an otherwise solvent business does not have the liquid assets in cash or other highly marketable assets necessary to meet its short term obligations it faces a liquidity problem obligations can include repaying loans paying its ongoing operational bills and paying its employees | these business may have enough value in total assets to meet all these in the long run but if it does not have enough cash to pay them as they come due then it will default and could eventually enter bankruptcy as creditors demand repayment the root of the problem is usually a mismatch between the maturities of investments the business has made and the liabilities the business has incurred in order to finance its investments this produces a cash flow problem where the anticipated revenue from the business various projects does not arrive soon enough or in sufficient volume to make payments toward the corresponding financing for businesses this type of cash flow problem can be entirely avoided by the business choosing investment projects whose expected revenue matches the repayment plans for any related financing well enough to avoid any missed payments alternatively the business can try to match maturities on an ongoing basis by taking on additional short term debt from lenders or maintaining a sufficient self financed reserve of liquid assets on hand in effect relying on equity holders to make payments as they come due many businesses do this by relying on short term loans to meet business needs often this financing is structured for less than a year and can help a company meet payroll and other demands if a business investments and debt are mismatched in maturity additional short term financing is not available and self financed reserves are not sufficient then the business will either need to sell other assets to generate cash known as liquidating assets or face default when the company faces a shortage of liquidity and if the liquidity problem cannot not solved by liquidating sufficient assets to meet its obligations the company must declare bankruptcy banks and financial institutions are particularly vulnerable to these kind of liquidity problems because much of their revenue is generated by lending long term on loans for home mortgages or capital investments and borrowing short term from depositors accounts maturity mismatching is a normal and inherent part of the business model of most financial institutions and so they are usually in a continual position of needing to secure funds to meet immediate obligations either through additional short term debt self financed reserves or liquidating long term assets 1liquidity crisisindividual financial institutions are not the only ones who can have a liquidity problem when many financial institutions experience a simultaneous shortage of liquidity and draw down their self financed reserves seek additional short term debt from credit markets or try to sell off assets to generate cash a liquidity crisis can occur interest rates rise minimum required reserve limits become a binding constraint and assets fall in value or become unsaleable as everyone tries to sell at once the acute need for liquidity across institutions becomes a mutually self reinforcing positive feedback loop that can spread to impact institutions and businesses that were not initially facing any liquidity problem on their own entire countries and their economies can become engulfed in this situation for the economy as a whole a liquidity crisis means that the two main sources of liquidity in the economy banks loans and the commercial paper market become suddenly scarce banks reduce the number of loans they make or stop making loans altogether because so many non financial companies rely on these loans to meet their short term obligations this lack of lending has a ripple effect throughout the economy in a trickle down effect the lack of funds impacts a plethora of companies which in turn affects individuals employed by those firms a liquidity crisis can unfold in in response to a specific economic shock or as a feature of a normal business cycle for example during the financial crisis of the great recession many banks and non bank institutions had significant portions of their cash come from short term funds that were put towards financing long term mortgages when short term interest rates rose and real estate prices collapsed such arrangements forced a liquidity crisis 2a negative shock to economic expectations might drive the deposit holders with a bank or banks to make sudden large withdrawals if not their entire accounts this may be due to concerns about the stability of the specific institution or broader economic influences the account holder may see a need to have cash in hand immediately perhaps if widespread economic declines are feared such activity can leave banks deficient in cash and unable to cover all registered accounts | |
what is a liquidity event | a liquidity event is an acquisition merger initial public offering ipo or other action that allows founders and early investors in a company to cash out some or all of their ownership shares a liquidity event is considered an exit strategy for an illiquid investment or equity with little or no market to trade on founders of a firm push toward a liquidity event and investors like venture capital vc firms angel investors or private equity firms expect one within a reasonable amount of time after initially investing capital types of liquidity eventsa liquidity event is most commonly associated with founders and venture capital firms cashing in on their seed or early round investments the first handful of employees of the companies also stand to reap the windfall of their company going public or being bought out by another company in the case of an acquisition the founders and employees of the firm are usually retained there may be an initial liquidity event followed by additional compensation in shares or cash as they serve out their contracted terms with the new owners the most common liquidity events are ip0s and direct acquisitions by other companies or private equity firms the founders rolein some cases a liquidity event is not necessarily the goal of the founders of a firm though it certainly is for investors founders may not be motivated by the riches that a liquidity event bestows some founders may resist calls from early investors to take a company public out of fear of losing control mark zuckerberg his cofounders and the venture capital firms and individuals listed as shareholders in facebook s now meta pre ipo form s 1 filing in 2012 had a lot of positivity for its liquidity event the company raised 16 billion in the ipo and began its first day as a publicly traded company with a valuation of 107 billion zuckerberg who owned 28 2 of facebook now meta before the ipo ended with a net worth of approximately 19 1 billion 1 | |
does the company control the timeline for an ipo | the timeline for an ipo is commonly under the control of the company however for a company with more than 10 million in assets and more than 2 000 investors or 500 shareholders who are not accredited investors the securities and exchange commission sec requires it to file financial reports for public consumption 2 this is known as the 2 000 investor limit | |
how many companies go public each year in the united states | in 2023 153 ipo deals raised 22 7 billion in the united states with 132 on u s exchanges 3 | |
what is a venture capitalist | a venture capitalist vc is a private equity investor who provides capital to companies with high growth potential in exchange for an equity stake the investment could include funding for startup ventures or expansion efforts the bottom linea liquidity event is an event that allows a company s early investors to cash out some or all of their equity this can be accomplished through an acquisition merger or initial public offering ipo companies usually file sec form s 1 in anticipation of their initial public offering ipo | |
liquidity preference theory argues that people prefer to keep assets in a liquid form such as cash rather than in less liquid assets like bonds stocks or real estate the upshot is that investors expect a greater premium for taking on a longer term loss of liquidity | this inclination is primarily due to the uncertainty of the future individuals businesses and investors can better navigate unforeseen financial and economic changes especially during crises by holding liquid assets investopedia jake shithere s a tradeoff however between holding cash that offers liquidity but no returns versus bonds that provide interest or returns but are less liquid the interest rate is effectively the reward that investors demand to part with liquidity and hold less liquid assets like bonds liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets the more people prefer liquidity the higher interest rates must rise to make them willing to hold bonds the theory views interest rates as a payment for parting with liquidity | |
how does liquidity preference theory work | liquidity preference theory was developed by john maynard keynes it aims to explain how interest rates are determined 1 the key premise is that people naturally prefer holding assets in liquid form so they can be quickly converted into cash at little cost the most liquid asset is money economic conditions like recessions that create uncertainty raise liquidity preference as people want to remain more liquid this requires higher interest rates to induce a shift to illiquid assets the liquidity preference theory views interest rates as emerging from people s desire for liquidity versus illiquid interest earning assets interest rates provide an incentive for people to overcome their liquidity preference and hold less liquid assets like bonds according to the theory 1 bonds provide interest income but are less liquid than cash because they can t immediately be converted to money the more illiquid a bond the more incentive people will need in terms of its interest rate 2the theory holds that interest rates are determined by the supply and demand for money for this reason people want to hold more cash decreasing the money supply and reducing bond prices when liquidity preference is high interest rates have to rise as an incentive for giving up this liquidity to match this preference a lower liquidity preference conversely means that people are willing to hold more bonds increasing the money supply and lowering interest rates 3who was john maynard keynes john maynard keynes was an influential 20th century british economist his groundbreaking 1936 work the general theory of employment interest and money challenged conventional economic wisdom and laid the foundation for modern macroeconomic theory his economic theories are collectively termed keynesian economics they fundamentally changed how governments and financial institutions perceive and respond to economic crises and helped shape postwar economic thinking he championed the idea that government intervention is crucial to stabilizing economies during financial downturns his work became the cornerstone of modern macroeconomic theory although it s been challenged often by neoclassical economists monetarist theorists and others over the years liquidity preference theory is one of his notable contributions three motives of liquidity preferencekeynes argued that the desire for liquidity springs from three motives transactions precautionary motives and speculative motives liquidity preference and the yield curveliquidity preference theory has important implications for the shape and movement of the yield curve that plots interest rates across various maturities for bonds of the same credit quality the yield curve normally slopes upward long term interest rates are higher than short term rates imagine a line graph where the vertical axis is for interest rates and the horizontal axis extends time for the duration of investments the yield curve indicates what interest rates you can earn for different lengths of time the graph slopes upward under normal circumstances you ll see higher interest rates as you invest your money for longer periods this upward slope reveals that people expect higher returns for locking their money away in long term investments like bonds this fits with what liquidity preference theory would suggest individuals prefer liquidity leading them to favor short term securities over long term ones short term securities provide more liquidity because they mature faster this enables reinvestment or cashing out sooner this higher demand for short term bonds leads to lower short term interest rates their interest rates decline as bond prices are bid higher but these bonds must offer higher interest rates to compensate for the decrease in liquidity to entice investors toward long term securities this dynamic naturally steepens the yield curve changes in liquidity preference can also shift the position and shape of the yield curve the demand for short term bonds will increase as investors flock to quality liquid assets when liquidity preferences rise due to uncertainty or a recession this raises short term rates relative to long term rates flattening or inverting the yield curve the yield curve steepens as investors become more willing to invest in higher yielding long term bonds when liquidity preferences decline during periods of economic stability a steeper yield curve implies a higher liquidity premium as investors demand more for holding long term bonds a flatter or inverted yield curve could indicate lower liquidity premiums or other market dynamics at play liquidity preference theory and investingliquidity preference theory provides a useful framework for investors to consider when they re making asset allocation and risk management decisions investors can apply their understanding of liquidity preference to choose assets and strategies that align with their liquidity needs and risk tolerance investors might increase allocations to safe and liquid assets like cash and short term government bonds during periods of high liquidity preference such as recessions holding highly liquid assets provides protection and the flexibility to shift into other investments when the market changes you might take on more risk and illiquidity through investments like stocks real estate or high yield bonds when that occurs the theory also highlights the value of laddering strategies and planning investments to provide a steady cash flow to balance liquidity bond ladders with staggered maturities can provide stable cash inflows to cover liquidity needs cash reserve buffers also help manage liquidity risk investors can hold higher cash reserves when liquidity preferences rise to avoid being forced to sell illiquid assets at unfavorable prices liquidity preference theory doesn t give you an ideal set of assets to buy but it provides a framework for adapting to economic conditions and your liquidity needs investors can apply the theory to build portfolios that are resilient across the liquidity preference cycle combining liquid low risk assets with higher return illiquid assets in appropriate proportions criticisms of liquidity preference theoryliquidity preference theory is influential but it s been critiqued by some economists one common objection is that many complex factors determine interest rates not just liquidity preference the approach is also said to simplify changes in interest rates to just the demand and supply of money but factors like inflation default risk credit risk and the range of investment opportunities also do so 4the theory has been criticized as being too passive it sees interest rates adapting to changing liquidity preferences rather than vice versa monetary policy can actively affect interest rates however affecting investment and consumption behavior beyond just passively responding to liquidity demand 5the empirical evidence for the impact of liquidity preference on interest rates is mixed some economists argue that other factors like inflation expectations play a bigger role in shaping rate changes 6measuring liquidity preference quantitatively is also difficult the theory may not work well in the globalized economy of the 2020s capital mobility allows liquidity to flow internationally to where rates are highest so national interest rates would reflect global liquidity preferences not just domestic factors 7 | |
how does liquidity preference theory help understand financial crises | liquidity preference theory can shed light on liquidity dynamics and its effect on financial stability the heightened preference for liquidity during financial crises can exacerbate market conditions a sudden rush for liquidity can lead to fire sales of assets plummeting asset prices and a tightening of financial conditions policymakers and financial institutions can better anticipate and mitigate the adverse effects of financial crises by understanding the principles of liquidity preference they can devise strategies to enhance financial stability | |
do other economic theories build on or challenge liquidity preference theory | several contemporary economic theories challenge or build upon liquidity preferences rational expectations and market efficiency theories often posit that markets adjust quickly to new information which might undercut the speculative motive for liquidity preference developing financial instruments and technologies that enhance liquidity and manage liquidity risk can also lead to rethinking liquidity preference modern monetary theory and post keynesian economics build upon or extend keynesian ideas including liquidity preference theory however to explain modern economic phenomena | |
how does fiscal policy influence liquidity preferences | fiscal policy uses government spending and tax policies to influence economic conditions expansionary fiscal policy increases government spending or cuts taxes and can lower liquidity preference by stimulating economic growth and confidence this can lead to lower interest rates contractionary fiscal policies often raise liquidity preference because of heightened uncertainty putting upward pressure on rates the bottom lineliquidity preference theory attempts to explain the relationship between liquidity interest rates and economic stability it highlights how individual and institutional behaviors regarding liquidity can occur within financial markets liquidity preference theory originated in the work of keynes and continues to serve as a pivotal lens through which to consider monetary economics phenomena a grasp of liquidity preference by investors can be productive in making better asset allocation and risk management decisions it sheds light on how monetary policies might sway interest rates and market stability for policymakers | |
liquidity premium is the additional compensation used to encourage investments in assets that cannot be easily or quickly converted into cash at fair market value for example a long term bond will carry a higher interest rate than a short term bond because it is relatively illiquid the higher return is the liquidity premium offered to the investor as compensation for the additional risk | understanding liquidity premiuminvestors in illiquid assets generally require more of a return for the added risk of putting their money in assets that can t be sold for an extended period especially if the value of the asset is expected to fluctuate in either direction suppose you have two bonds each with the same characteristics maturity credit risk tax status etc but one can be traded more easily the less liquid bond will usually offer a higher yield as compensation for your reduced ability to exchange it liquid investments are assets easily and quickly converted to cash at fair market value like a savings account or a short term treasury bond the returns may be low but the money is safe and can be accessed at any time relatively easily for its fair value many bonds are relatively liquid and readily convertible in the active secondary market illiquidity is considered a risk because it limits your ability to quickly convert an asset into cash without significantly affecting its price hence if you need to sell an illiquid asset promptly you may have to do so at a significant discount to its perceived market value incurring a loss there is also the potential opportunity cost for the time your money is invested in the illiquid asset illiquid investments can take many forms including certificates of deposit certain loans annuities and other investment assets that the purchaser must hold for a specified period these investments cannot be liquidated or withdrawn early without a penalty other assets are said to be illiquid because they have no active secondary market that can be used to realize their fair market value the liquidity premium is built into the return on these types of investments to compensate for the risk the investor takes in locking up funds in general investors who choose to put money in such illiquid investments need to be rewarded for the added risks that a lack of liquidity poses investors with the capital to put money in longer term investments can benefit from the liquidity premium earned from these investments illiquid investments are those that cannot be easily converted into cash without a significant loss in value here are some examples understanding an asset s liquidity is an essential part of risk management and portfolio strategy the terms illiquidity premium and liquidity premium are used interchangeably both mean that an investor receives an incentive for an investment not easily convertible into cash liquidity premium and the yield curvethe yield curve is a graph that shows the interest rate of bonds with similar credit quality but different maturity dates in general longer maturities result in higher yields but investors can use the shape of the yield curve to predict future changes to interest rates and market activity the liquidity premium is one of the primary ways to explain why longer term bonds tend to offer higher interest rates the longer you have to wait for a bond to mature the less liquid it is thus a longer term bond has to offer a higher yield to make up for its lower liquidity calculating liquidity premiumsthe simplest way to calculate a liquidity premium is to compare similar investments one of which is liquid and one of which is not for example you could compare two bonds from companies with similar credit ratings if one bond is publicly traded and one bond is not traded on the open market they will likely have different yields with the one that is publicly traded providing a lower return because the non traded bond is less liquid it must offer a higher yield the difference between its yield and the yield of the other bond is the liquidity premium examples of liquidity premiumsthe shape of the yield curve illustrates the liquidity premium demanded from investors for longer term investments in a balanced economic environment longer term investments require a higher rate of return than shorter term investments thus the upward sloping shape of the yield curve looking beyond bonds suppose you are offered two investment properties that are virtually identical in all respects location square footage condition etc however property a is in a well established neighborhood with high demand making it relatively easy to sell quickly property b is in a similar area but one with lower demand making it harder to sell or rent out because property b is less liquid buyers can demand a higher rate of return to compensate for the risk and inconvenience of potentially holding onto the property for a longer period let s consider another example suppose you can put money into two different technology companies with very similar business models growth prospects and profitability company a is publicly traded so you know you can easily buy and sell the shares on a stock exchange company b though is privately held and is offered in a private equity deal which means it likely has restrictions on when and how you can liquidate your stake because of this company b will probably come with higher promised returns since its shares are not as easily converted to money | |
is a high liquidity premium a good thing | a high liquidity premium means something cannot be easily sold for cash the higher premium means it should offer a greater long term return however in some cases giving up flexibility may not be worth it finding the right balance between yield and liquidity is key can you have a negative liquidity premium yes it s possible to have a negative liquidity premium this can occur when the yield curve inverts meaning longer term bonds offer less yield than short term ones this is uncommon and investors often view it as a sign that the wider economy is not faring well | |
what is a liquidity trap | a liquidity trap happens when individuals hold onto their money rather than spend or invest it people anticipate that prices will remain stagnant or fall so they prefer the safety of holding onto their money this can hamper efforts by central banks to boost economic activity it can also happen when yields fall so low that people hesitate to buy bonds as a result changes in the money supply have little effect on changing economic behavior leaving an economy stuck in a period of slow growth and low inflation or even deflation the bottom lineliquidity premium is the higher yield offered among similar investments for those that are less liquid the less liquid an investment is the harder it is to sell quickly for its fair market value and the greater its liquidity premium tends to be when considering liquidity it s essential to gauge whether the added return is worth the extra risk and limitations that less liquid investment options can have you can then more accurately assess the true costs and potential rewards of different investment options | |
what are liquidity ratios | liquidity ratios are a class of financial metrics used to determine a debtor s ability to pay off current debt obligations without raising external capital liquidity ratios measure a company s ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio quick ratio and operating cash flow ratio understanding liquidity ratiosliquidity is the ability to convert assets into cash quickly and cheaply liquidity ratios are most useful when they are used in comparative form this analysis may be internal or external for example internal analysis regarding liquidity ratios involves using multiple accounting periods that are reported using the same accounting methods comparing previous periods to current operations allows analysts to track changes in the business in general a higher liquidity ratio shows a company is more liquid and has better coverage of outstanding debts alternatively external analysis involves comparing the liquidity ratios of one company to another or an entire industry this information is useful in comparing the company s strategic positioning to its competitors when establishing benchmark goals liquidity ratio analysis may not be as effective when looking across industries as various businesses require different financing structures liquidity ratio analysis is less effective for comparing businesses of different sizes in different geographical locations with liquidity ratios current liabilities are most often compared to liquid assets to evaluate the ability to cover short term debts and obligations in case of an emergency types of liquidity ratiosthe current ratio measures a company s ability to pay off its current liabilities payable within one year with its total current assets such as cash accounts receivable and inventories calculations can be done by hand or using software such as excel the higher the ratio the better the company s liquidity position current ratio current assets current liabilities text current ratio frac text current assets text current liabilities current ratio current liabilitiescurrent assets the quick ratio measures a company s ability to meet its short term obligations with its most liquid assets and therefore excludes inventories from its current assets it is also known as the acid test ratio quick ratio c m s a r c l where c cash cash equivalents m s marketable securities a r accounts receivable c l current liabilities begin aligned text quick ratio frac c ms ar cl textbf where c text cash cash equivalents ms text marketable securities ar text accounts receivable cl text current liabilities end aligned quick ratio clc ms ar where c cash cash equivalentsms marketable securitiesar accounts receivablecl current liabilities another way to express this is quick ratio current assets inventory prepaid expenses current liabilities text quick ratio frac text current assets inventory prepaid expenses text current liabilities quick ratio current liabilities current assets inventory prepaid expenses days sales outstanding dso refers to the average number of days it takes a company to collect payment after it makes a sale a high dso means that a company is taking unduly long to collect payment and is tying up capital in receivables dsos are generally calculated on a quarterly or annual basis dso average accounts receivable revenue per day text dso frac text average accounts receivable text revenue per day dso revenue per dayaverage accounts receivable who uses liquidity ratios liquidity ratios are utilized by a variety of people there s one single purpose to liquidity ratios and their versatility makes them useful to a number of different users the following stakeholders in varying domains can each use liquidity ratios in distinct ways advantages and disadvantages of liquidity ratiosone of the primary advantages of liquidity ratios is their simplicity and ease of calculation this makes them accessible to investors creditors and analysts these ratios offer a quick snapshot of a company s liquidity position without delving into complex financial analysis for instance the current ratio which divides current assets by current liabilities can quickly be determined by glancing at a company s balance sheet another advantage of liquidity ratios is their utility in assessing a company s financial health and risk level a high liquidity ratio suggests that a company possesses sufficient liquid assets to handle its short term obligations comfortably a low liquidity ratio may signal potential liquidity issues though a company s financial health can t simply boil down to a single number liquidity ratios can simplify the process of evaluating how a company is doing liquidity ratios also facilitate comparison across companies and industries by benchmarking liquidity ratios against industry averages or competitors metrics stakeholders can identify strengths weaknesses and potential areas for improvement for instance you can compare microsoft s current ratio against google s current ratio to gauge how each company may be structured differently this can be an important part of deciding between companies to invest in especially if short term health is one of your primary considerations last liquidity ratios can communicate operational efficiency for instance a declining liquidity ratio may indicate deteriorating financial health or inefficient working capital management however it may also mean a company is trying to hold onto less cash and deploy capital more rapidly to achieve growth one drawback of liquidity ratios is that these ratios provide a static view of a company s liquidity position at a particular point in time this means they don t consider the dynamic nature of business operations and cash flows for example the current ratio may indicate sufficient liquidity based on current assets and liabilities but it doesn t account for the timing of cash inflows and outflows a company with high receivables and inventory turnover may have a healthy current ratio but struggle to convert these assets into cash quickly when needed as mentioned above under the advantages section liquidity ratios may not always capture the full picture of a company s financial health they focus solely on short term liquidity a company may maintain high liquidity ratios by holding excess cash or highly liquid assets which could be more effectively deployed elsewhere to generate returns for shareholders in addition a company could have a great liquidity ratio but be unprofitable and lose money each year last liquidity ratios may vary significantly across industries and business models though we listed comparability under the pro section there is also a risk that wrong decisions could be made when comparing different liquidity ratios for instance a capital intensive industry like construction may have a much different operational structure than that of a service industry like consulting comparing the liquidity ratios of different companies may not always be comparable fair or truly informative easy to calculate and understandprovides quick snapshot of liquidity positionhelps gauge financial stability and resiliencefacilitates comparison across companies and industries | |
doesn t account for dynamic cash flows | focuses solely on short term liquiditymay overlook profitability and solvency issuescomparisons across industries can be challenging or misleadingspecial considerationsa liquidity crisis can arise even at healthy companies if circumstances arise that make it difficult for them to meet short term obligations such as repaying their loans and paying their employees the best example of such a far reaching liquidity catastrophe is the global credit crunch of 2007 09 commercial paper short term debt that is issued by large companies to finance current assets and pay off current liabilities played a central role in this financial crisis a near total freeze in the 2 trillion u s commercial paper market made it exceedingly difficult for even the most solvent companies to raise short term funds at that time and hastened the demise of giant corporations such as lehman brothers and general motors gm 2however unless the financial system is in a credit crunch a company specific liquidity crisis can be resolved relatively easily with a liquidity injection as long as the company is solvent this is because the company can pledge some assets if it is required to raise cash to tide over the liquidity squeeze this route may not be available for a company that is technically insolvent because a liquidity crisis would exacerbate its financial situation and force it into bankruptcy solvency ratios vs liquidity ratiosin contrast to liquidity ratios solvency ratios measure a company s ability to meet its total financial obligations and long term debts solvency relates to a company s overall ability to pay debt obligations and continue business operations while liquidity focuses more on current or short term financial accounts a company must have more total assets than total liabilities to be solvent a company must have more current assets than current liabilities to be liquid although solvency does not relate directly to liquidity liquidity ratios present a preliminary expectation regarding a company s solvency the solvency ratio is calculated by dividing a company s net income and depreciation by its short term and long term liabilities this indicates whether a company s net income can cover its total liabilities generally a company with a higher solvency ratio is considered to be a more favorable investment profitability ratios vs liquidity ratiosprofitability ratios measure a company s ability to generate profit relative to its revenue assets or equity these ratios assess the efficiency and effectiveness of a company s operations providing insights into its ability to generate returns for shareholders in contrast liquidity ratios focus on a company s ability to meet its short term financial obligations promptly while profitability ratios focus on generating returns and maximizing profits liquidity ratios prioritize maintaining sufficient liquidity it s important to understand these are vastly different things a company can have sufficient money on hand to operate if it s built up capital however it may be draining the amount of reserves it has if operations aren t going well alternatively a company may be cash strapped but just starting out on a successful growth campaign with a positive outlook both types of ratios are essential for assessing different dimensions of a company s financial performance and risk profile investors and analysts often use them in combination to gain an understanding of a company s financial health note that a company may be profitable but not liquid and a company can also be highly liquid but not profitable example of using liquidity ratioslet s use a couple of these liquidity ratios to demonstrate their effectiveness in assessing a company s financial condition consider two hypothetical companies liquids inc and solvents co with the following assets and liabilities on their balance sheets figures in millions of dollars we assume that both companies operate in the same manufacturing sector i e industrial glues and solvents note that in our example we will assume that current liabilities only consist of accounts payable and other liabilities with no short term debt we can draw several conclusions about the financial condition of these two companies from these ratios liquids inc has a high degree of liquidity based on its current ratio it has 3 of current assets for every dollar of current liabilities its quick ratio points to adequate liquidity even after excluding inventories with 2 in assets that can be converted rapidly to cash for every dollar of current liabilities however financial leverage based on its solvency ratios appears quite high debt exceeds equity by more than three times while two thirds of assets have been financed by debt note as well that close to half of non current assets consist of intangible assets such as goodwill and patents as a result the ratio of debt to tangible assets calculated as 50 55 is 0 91 which means that over 90 of tangible assets plant equipment inventories etc have been financed by borrowing to summarize liquids inc has a comfortable liquidity position but it has a dangerously high degree of leverage solvents co is in a different position the company s current ratio of 0 4 possibly indicates an inadequate degree of liquidity with only 0 40 of current assets available to cover every 1 of current liabilities the quick ratio suggests an even less liquid position with only 0 20 of liquid assets for every 1 of current liabilities financial leverage however appears to be at comfortable levels with debt at only 25 of equity and only 13 of assets financed by debt even better the company s asset base consists wholly of tangible assets which means that solvents co s ratio of debt to tangible assets is about one seventh that of liquids inc approximately 13 versus 91 overall solvents co is in a potentially dangerous liquidity situation but it has a comfortable debt position | |
what is liquidity | liquidity refers to how easily or efficiently cash can be obtained to pay bills and other short term obligations assets that can be readily sold like stocks and bonds are also considered to be liquid although cash is of course the most liquid asset of all | |
why is liquidity important | businesses need enough liquidity on hand to cover their bills and obligations so that they can pay vendors keep up with payroll and keep their operations going day in and day out | |
how does liquidity differ from solvency | liquidity refers to the ability to cover short term obligations solvency on the other hand is a firm s ability to pay long term obligations for a firm this will often include being able to repay interest and principal on debts such as bonds or long term leases | |
why are there several liquidity ratios | fundamentally all liquidity ratios measure a firm s ability to cover short term obligations by dividing current assets by current liabilities cl the cash ratio looks at only the cash on hand divided by cl while the quick ratio adds in cash equivalents like money market holdings as well as marketable securities and accounts receivable the current ratio includes all current assets | |
what happens if ratios show a firm is not liquid | in this case a liquidity crisis can arise even at healthy companies if circumstances arise that make it difficult to meet short term obligations such as repaying their loans and paying their employees or suppliers one example of a far reaching liquidity crisis from recent history is the global credit crunch of 2007 09 where many companies found themselves unable to secure short term financing to pay their immediate obligations the bottom lineliquidity ratios are simple yet powerful financial metrics that provide insight into a company s ability to meet its short term obligations promptly they offer a quick snapshot of the liquidity position aiding stakeholders in assessing financial stability resilience and making informed decisions | |
liquidity risk refers to the potential difficulty an entity may face in meeting its short term financial obligations due to an inability to convert assets into cash without incurring a substantial loss this risk is inherent in both financial institutions and corporations significantly impacting their operational and financial stability | liquidity risk is often characterized by two main aspects market liquidity risk and funding liquidity risk market liquidity risk is associated with an entity s inability to execute transactions at prevailing market prices due to insufficient market depth or disruptions on the other hand funding liquidity risk pertains to the inability to obtain sufficient funding to meet financial obligations liquidity risk is not confined to any particular sector as it is an important consideration across banks financial institutions corporations and even some individual investors for banks and financial institutions liquidity risk management is underscored by regulatory frameworks that mandate certain liquidity standards to ensure financial stability and protect depositor interests corporations too need to be vigilant in managing liquidity risk to ensure they have adequate cash or credit lines to meet their operational and financial commitments the ability to manage liquidity risk is essential for ensuring it has enough cash on hand to meet its short term needs and obligations understanding liquidity riskliquidity risk embodies the potential hurdles a firm organization or other entity might encounter in fulfilling its short term financial obligations due to a lack of cash on hand or an inability to convert assets into cash without suffering a significant loss this form of risk arises from various scenarios including market changes unforeseen expenses or withdrawals or a sudden uptick in liabilities the essence of liquidity risk lies in the mismatch between assets and liabilities where the assets cannot be easily liquidated at market value to meet the short term obligations management of liquidity risk is critical to ensure that cash needs are continuously met for instance maintaining a portfolio of high quality liquid assets employing rigorous cash flow forecasting and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk additionally adhering to regulatory frameworks that advocate for certain liquidity thresholds also serves as a proactive measure in managing liquidity risk the repercussions of unmanaged or poorly managed liquidity risk can be severe and far reaching it can lead to financial losses from the sale of assets at depressed prices operational disruptions due to inadequate cash flow and reputational damage which can further exacerbate liquidity issues in extreme cases liquidity risk can drive an entity towards insolvency or bankruptcy underscoring the imperative for robust liquidity risk management practices in general liquidity risk comes in two forms market liquidity risk and funding liquidity risk both dimensions of liquidity risk are interconnected and can exacerbate each other for instance an inability to secure short term funding funding liquidity risk may compel an entity to sell assets at a loss market liquidity risk which could further impair its financial position and deter potential lenders or investors market liquidity riskmarket liquidity risk relates to when an entity is unable to execute transactions at prevailing market prices due to inadequate market depth have very few available buyers for assets held or other market disruptions this form of risk is particularly palpable in illiquid markets where the demand and supply dynamics are skewed making it challenging to execute large transactions at a fair price without affecting the market for instance selling a large volume of shares in a thinly traded stock could substantially depress the share price incurring a loss for the seller funding liquidity riskfunding liquidity risk pertains to the challenges an entity may face in obtaining the necessary funds to meet its short term financial obligations this is often a reflection of the entity s mismanagement of cash its creditworthiness or prevailing market conditions which could deter lenders or investors from stepping in to help for example during periods of financial turbulence even creditworthy entities might find it challenging to secure short term funding at favorable terms liquidity and solvency are related terms but differ in important ways liquidity risk relates to short term cash flow issues while solvency risk means the company is insolvent on its overall balance sheet especially related to long term debts liquidity problems can potentially lead to insolvency if not addressed but the two have distinct meanings liquidity risk and banksfor banks liquidity risk arises naturally from certain aspects of their day to day operations for example banks tend to fund long term loans like mortgages with short term liabilities like deposits this maturity mismatch creates liquidity risk if depositors withdraw funds suddenly the mismatch between banks short term funding and long term illiquid assets creates inherent liquidity risk this is exacerbated by a reliance on flighty wholesale funding and the potential for sudden unexpected demands for liquidity by depositors the meticulous management of liquidity risk by banks is not only a prudential measure but a regulatory imperative mandated by robust frameworks like basel iii basel iii developed by the basel committee on banking supervision sets forth stringent liquidity standards aimed at enhancing the banking sector s ability to absorb shocks arising from financial and economic stress 1 basel iii standards apply to internationally active banks and the rules apply broadly to large eu uk japanese canadian and australian banks with international operations however exact requirements are set by national regulators in the us for example basel iii rules apply to bank holding companies with over 250 billion in assets and some requirements trickle down to smaller regional banks key components of basel iii include the liquidity coverage ratio lcr and the net stable funding ratio nsfr the lcr mandates banks to hold high quality liquid assets that can be readily converted to cash to meet their net cash outflows over a 30 day stress test scenario while the nsfr requires banks to maintain a stable funding profile in relation to the composition of their assets and off balance sheet activities promoting long term resilience against liquidity risk in addition to basel iii several other regulatory frameworks and guidelines are in play for banks underlining the global emphasis on robust liquidity risk management in the european union the capital requirements directive iv crd iv and capital requirements regulation crr govern liquidity risk management for banks 23 these regulations incorporate the basel iii standards while also providing a localized framework that addresses the unique characteristics of the european banking sector similarly in the united states the dodd frank wall street reform and consumer financial protection act has provisions that bolster liquidity risk management to protect depositors including stress testing requirements under the comprehensive capital analysis and review ccar and the dodd frank act stress test dfast frameworks 4here s a deeper dive into how banks navigate the waters of liquidity risk 5one stark illustration of liquidity risk is the phenomenon of bank runs which occur when a large number of depositors withdraw their funds simultaneously due to fears of the bank s insolvency liquidity risk and corporationslike banks corporations may fund long term assets like property plant equipment pp e with short term liabilities like commercial paper this exposes them to potential liquidity risk volatile cash flows from operations can make it difficult to service short term liabilities as a result seasonal businesses are especially exposed delayed payments from customers can further reduce incoming cash flow and strain liquidity but unlike their counterparts in the highly regulated banking sector non financial companies operate within a wide array of business models each bringing its unique set of challenges and intricacies in managing liquidity risk whereas banks are fundamentally geared towards managing deposits and loans corporations navigate through a broader spectrum of operational and financial activities that can impact liquidity the dynamic nature of corporate operations coupled with the absence of regulatory frameworks akin to those enveloping banks calls for a tailored approach towards managing liquidity risk here are some common strategies employed by corporations to ensure they stay afloat in the face of liquidity challenges let s consider a hypothetical mid sized manufacturing company acme corp which has been in operation for over two decades acme corp has always prided itself on its robust sales and steady cash flow which have provided a solid financial foundation for its operations however a confluence of unexpected events tests acme corp s financial mettle say that in the first quarter of this year the economy takes a downturn due to escalating geopolitical tensions these tensions lead to trade restrictions causing disruptions in acme corp s supply chain consequently the cost of raw materials spikes and delivery timelines stretch causing production delays meanwhile a significant portion of acme corp s working capital is tied up in a new plant that s under construction aimed at expanding the company s production capacity at the same time acme corp has short term debt obligations coming due the company approaches its bank for an extension of its credit line to manage the liquidity crunch however given the economic downturn the bank is cautious and only offers a smaller extension than what acme corp had hoped for now acme corp is facing a liquidity risk it has bills to pay debt obligations coming due payroll and a new plant that requires further investment to become operational the delayed payments from customers and the inadequate extension of the credit line exacerbate the liquidity crunch in a bid to manage the situation acme corp considers selling some of its long term investments however the market conditions remain unfavorable and the returns on selling these investments at this juncture would incur a significant loss the company also explores the option of laying off some of its workforce to reduce operational costs but this comes with the risk of losing skilled labor and facing potential legal and reputational repercussions this hypothetical scenario illuminates the multifaceted nature of liquidity risk where a mixture of external economic conditions operational hitches and financial obligations converge to challenge the financial stability of acme corp it underscores the imperative for corporations to have robust liquidity risk management strategies in place to navigate through such turbulent financial waters | |
how individuals can manage liquidity risk | liquidity risk is a very real threat for individuals in their personal finances job loss or an unexpected disruption of income can quickly lead to an inability to meet bills financial obligations or cover basic needs individuals face heightened liquidity risk when they lack adequate emergency savings rely on accessing long term assets like home equity to fund short term spending needs over utilize credit lines and cards or have an excessive debt service burden relative to income unexpected costs from medical bills home repairs etc can also quickly create liquidity crunches if proper precautions are not taken individuals can manage liquidity risk by maintaining a reasonable budget and living within their means having an emergency fund with sufficient cash to cover living expenses for several months is a prudent strategy additionally individuals can diversify their investments and ensure they have access to liquid assets or credit facilities to meet unexpected financial needs | |
how does liquidity risk relate to market risk and credit risk | liquidity risk market risk and credit risk are distinct types of financial risks but they are interrelated market risk pertains to the fluctuations in asset prices due to changes in market conditions credit risk involves the potential loss from a borrower s failure to repay a loan or meet contractual obligations liquidity risk might exacerbate market risk and credit risk for instance a company facing liquidity issues might sell assets in a declining market incurring losses market risk or might default on its obligations credit risk can liquidity risk affect the broader economy absolutely liquidity risk can have ripple effects across the broader economy for instance during a financial crisis liquidity issues in major financial institutions can lead to a credit crunch where lending becomes restricted thereby impacting businesses consumers and overall economic growth similarly liquidity problems in large corporations can result in job losses reduced consumer spending and a decline in investor confidence 6 | |
what is the best way to measure liquidity risk | two of the most common ways to measure liquidity risk are the quick ratio and the common ratio the common ratio is a calculation of a corporation s current assets divided by current liabilities liquidity risk is a factor that banks corporations and individuals may encounter when they are unable to meet short term financial obligations due to insufficient cash or the inability to convert assets into cash without significant loss the management of this risk is crucial to prevent operational disruptions financial losses and in severe cases insolvency or bankruptcy the landscape of managing liquidity risk has evolved with digital technologies offering real time analytics and automated solutions regulatory frameworks like basel iii guide banks in maintaining certain liquidity standards while corporations adopt diverse strategies such as maintaining cash reserves and diversifying funding sources to mitigate this risk the repercussions of liquidity risk highlight the importance of proactive management to ensure financial stability and continuity in operations | |
liquidity risk refers to the potential difficulty an entity may face in meeting its short term financial obligations due to an inability to convert assets into cash without incurring a substantial loss this risk is inherent in both financial institutions and corporations significantly impacting their operational and financial stability | liquidity risk is often characterized by two main aspects market liquidity risk and funding liquidity risk market liquidity risk is associated with an entity s inability to execute transactions at prevailing market prices due to insufficient market depth or disruptions on the other hand funding liquidity risk pertains to the inability to obtain sufficient funding to meet financial obligations liquidity risk is not confined to any particular sector as it is an important consideration across banks financial institutions corporations and even some individual investors for banks and financial institutions liquidity risk management is underscored by regulatory frameworks that mandate certain liquidity standards to ensure financial stability and protect depositor interests corporations too need to be vigilant in managing liquidity risk to ensure they have adequate cash or credit lines to meet their operational and financial commitments the ability to manage liquidity risk is essential for ensuring it has enough cash on hand to meet its short term needs and obligations understanding liquidity riskliquidity risk embodies the potential hurdles a firm organization or other entity might encounter in fulfilling its short term financial obligations due to a lack of cash on hand or an inability to convert assets into cash without suffering a significant loss this form of risk arises from various scenarios including market changes unforeseen expenses or withdrawals or a sudden uptick in liabilities the essence of liquidity risk lies in the mismatch between assets and liabilities where the assets cannot be easily liquidated at market value to meet the short term obligations management of liquidity risk is critical to ensure that cash needs are continuously met for instance maintaining a portfolio of high quality liquid assets employing rigorous cash flow forecasting and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk additionally adhering to regulatory frameworks that advocate for certain liquidity thresholds also serves as a proactive measure in managing liquidity risk the repercussions of unmanaged or poorly managed liquidity risk can be severe and far reaching it can lead to financial losses from the sale of assets at depressed prices operational disruptions due to inadequate cash flow and reputational damage which can further exacerbate liquidity issues in extreme cases liquidity risk can drive an entity towards insolvency or bankruptcy underscoring the imperative for robust liquidity risk management practices in general liquidity risk comes in two forms market liquidity risk and funding liquidity risk both dimensions of liquidity risk are interconnected and can exacerbate each other for instance an inability to secure short term funding funding liquidity risk may compel an entity to sell assets at a loss market liquidity risk which could further impair its financial position and deter potential lenders or investors market liquidity riskmarket liquidity risk relates to when an entity is unable to execute transactions at prevailing market prices due to inadequate market depth have very few available buyers for assets held or other market disruptions this form of risk is particularly palpable in illiquid markets where the demand and supply dynamics are skewed making it challenging to execute large transactions at a fair price without affecting the market for instance selling a large volume of shares in a thinly traded stock could substantially depress the share price incurring a loss for the seller funding liquidity riskfunding liquidity risk pertains to the challenges an entity may face in obtaining the necessary funds to meet its short term financial obligations this is often a reflection of the entity s mismanagement of cash its creditworthiness or prevailing market conditions which could deter lenders or investors from stepping in to help for example during periods of financial turbulence even creditworthy entities might find it challenging to secure short term funding at favorable terms liquidity and solvency are related terms but differ in important ways liquidity risk relates to short term cash flow issues while solvency risk means the company is insolvent on its overall balance sheet especially related to long term debts liquidity problems can potentially lead to insolvency if not addressed but the two have distinct meanings liquidity risk and banksfor banks liquidity risk arises naturally from certain aspects of their day to day operations for example banks tend to fund long term loans like mortgages with short term liabilities like deposits this maturity mismatch creates liquidity risk if depositors withdraw funds suddenly the mismatch between banks short term funding and long term illiquid assets creates inherent liquidity risk this is exacerbated by a reliance on flighty wholesale funding and the potential for sudden unexpected demands for liquidity by depositors the meticulous management of liquidity risk by banks is not only a prudential measure but a regulatory imperative mandated by robust frameworks like basel iii basel iii developed by the basel committee on banking supervision sets forth stringent liquidity standards aimed at enhancing the banking sector s ability to absorb shocks arising from financial and economic stress 1 basel iii standards apply to internationally active banks and the rules apply broadly to large eu uk japanese canadian and australian banks with international operations however exact requirements are set by national regulators in the us for example basel iii rules apply to bank holding companies with over 250 billion in assets and some requirements trickle down to smaller regional banks key components of basel iii include the liquidity coverage ratio lcr and the net stable funding ratio nsfr the lcr mandates banks to hold high quality liquid assets that can be readily converted to cash to meet their net cash outflows over a 30 day stress test scenario while the nsfr requires banks to maintain a stable funding profile in relation to the composition of their assets and off balance sheet activities promoting long term resilience against liquidity risk in addition to basel iii several other regulatory frameworks and guidelines are in play for banks underlining the global emphasis on robust liquidity risk management in the european union the capital requirements directive iv crd iv and capital requirements regulation crr govern liquidity risk management for banks 23 these regulations incorporate the basel iii standards while also providing a localized framework that addresses the unique characteristics of the european banking sector similarly in the united states the dodd frank wall street reform and consumer financial protection act has provisions that bolster liquidity risk management to protect depositors including stress testing requirements under the comprehensive capital analysis and review ccar and the dodd frank act stress test dfast frameworks 4here s a deeper dive into how banks navigate the waters of liquidity risk 5one stark illustration of liquidity risk is the phenomenon of bank runs which occur when a large number of depositors withdraw their funds simultaneously due to fears of the bank s insolvency liquidity risk and corporationslike banks corporations may fund long term assets like property plant equipment pp e with short term liabilities like commercial paper this exposes them to potential liquidity risk volatile cash flows from operations can make it difficult to service short term liabilities as a result seasonal businesses are especially exposed delayed payments from customers can further reduce incoming cash flow and strain liquidity but unlike their counterparts in the highly regulated banking sector non financial companies operate within a wide array of business models each bringing its unique set of challenges and intricacies in managing liquidity risk whereas banks are fundamentally geared towards managing deposits and loans corporations navigate through a broader spectrum of operational and financial activities that can impact liquidity the dynamic nature of corporate operations coupled with the absence of regulatory frameworks akin to those enveloping banks calls for a tailored approach towards managing liquidity risk here are some common strategies employed by corporations to ensure they stay afloat in the face of liquidity challenges let s consider a hypothetical mid sized manufacturing company acme corp which has been in operation for over two decades acme corp has always prided itself on its robust sales and steady cash flow which have provided a solid financial foundation for its operations however a confluence of unexpected events tests acme corp s financial mettle say that in the first quarter of this year the economy takes a downturn due to escalating geopolitical tensions these tensions lead to trade restrictions causing disruptions in acme corp s supply chain consequently the cost of raw materials spikes and delivery timelines stretch causing production delays meanwhile a significant portion of acme corp s working capital is tied up in a new plant that s under construction aimed at expanding the company s production capacity at the same time acme corp has short term debt obligations coming due the company approaches its bank for an extension of its credit line to manage the liquidity crunch however given the economic downturn the bank is cautious and only offers a smaller extension than what acme corp had hoped for now acme corp is facing a liquidity risk it has bills to pay debt obligations coming due payroll and a new plant that requires further investment to become operational the delayed payments from customers and the inadequate extension of the credit line exacerbate the liquidity crunch in a bid to manage the situation acme corp considers selling some of its long term investments however the market conditions remain unfavorable and the returns on selling these investments at this juncture would incur a significant loss the company also explores the option of laying off some of its workforce to reduce operational costs but this comes with the risk of losing skilled labor and facing potential legal and reputational repercussions this hypothetical scenario illuminates the multifaceted nature of liquidity risk where a mixture of external economic conditions operational hitches and financial obligations converge to challenge the financial stability of acme corp it underscores the imperative for corporations to have robust liquidity risk management strategies in place to navigate through such turbulent financial waters | |
how individuals can manage liquidity risk | liquidity risk is a very real threat for individuals in their personal finances job loss or an unexpected disruption of income can quickly lead to an inability to meet bills financial obligations or cover basic needs individuals face heightened liquidity risk when they lack adequate emergency savings rely on accessing long term assets like home equity to fund short term spending needs over utilize credit lines and cards or have an excessive debt service burden relative to income unexpected costs from medical bills home repairs etc can also quickly create liquidity crunches if proper precautions are not taken individuals can manage liquidity risk by maintaining a reasonable budget and living within their means having an emergency fund with sufficient cash to cover living expenses for several months is a prudent strategy additionally individuals can diversify their investments and ensure they have access to liquid assets or credit facilities to meet unexpected financial needs | |
how does liquidity risk relate to market risk and credit risk | liquidity risk market risk and credit risk are distinct types of financial risks but they are interrelated market risk pertains to the fluctuations in asset prices due to changes in market conditions credit risk involves the potential loss from a borrower s failure to repay a loan or meet contractual obligations liquidity risk might exacerbate market risk and credit risk for instance a company facing liquidity issues might sell assets in a declining market incurring losses market risk or might default on its obligations credit risk can liquidity risk affect the broader economy absolutely liquidity risk can have ripple effects across the broader economy for instance during a financial crisis liquidity issues in major financial institutions can lead to a credit crunch where lending becomes restricted thereby impacting businesses consumers and overall economic growth similarly liquidity problems in large corporations can result in job losses reduced consumer spending and a decline in investor confidence 6 | |
what is the best way to measure liquidity risk | two of the most common ways to measure liquidity risk are the quick ratio and the common ratio the common ratio is a calculation of a corporation s current assets divided by current liabilities liquidity risk is a factor that banks corporations and individuals may encounter when they are unable to meet short term financial obligations due to insufficient cash or the inability to convert assets into cash without significant loss the management of this risk is crucial to prevent operational disruptions financial losses and in severe cases insolvency or bankruptcy the landscape of managing liquidity risk has evolved with digital technologies offering real time analytics and automated solutions regulatory frameworks like basel iii guide banks in maintaining certain liquidity standards while corporations adopt diverse strategies such as maintaining cash reserves and diversifying funding sources to mitigate this risk the repercussions of liquidity risk highlight the importance of proactive management to ensure financial stability and continuity in operations | |
what is liquefied natural gas lng | liquefied natural gas lng is natural gas that has been converted to a liquid form for the ease and safety of natural gas transport natural gas is cooled to approximately 260 f creating a clear colorless and non toxic liquid that can be transported from areas with a large supply of natural gas to areas that demand more natural gas in its liquid state natural gas takes up 1 600th of the space meaning that natural gas is shrunk 600 times making it much easier to ship and store when pipeline transport is not feasible as world energy consumption increases experts anticipate that the lng trade will grow in importance | |
how liquefied natural gas lng works | liquefied natural gas is primarily used to transport natural gas from one source to another exporters use this method when shipping to different countries and across bodies of water when pipelines aren t available there are two main approaches to liquefying natural gas in large quantitiesthe cascade process refers to the cooling of one gas by another gas resulting in a cascading effect the linde method is regenerative cooling where it is compressed cooled and expanded until it is eventually cooled into a liquid liquefied natural gas is best known as a transport tool but it is starting to gain mainstream adoption the automotive industry is evaluating the usefulness of gas as fuel for internal combustion engines in over the road trucking off road vehicles marine vessels and railways global demand for liquefied natural gas lng despite having one of the world s largest reserves of natural gas the united states imports a small percentage of its natural gas as liquefied natural gas from france and trinidad in fact as of 2019 the united states was the third largest exporter of lng and is expected to become the largest exporter by 2025 surpassing australia and qatar 1in 2020 the largest importers of u s lng were south korea japan and china 2 future demand growth will come from asian countries as they look toward lng as a replacement for coal as an energy source once the natural gas is liquefied it is then stored in special tankers and transported to its point of destination there is no possibility of lng exploding if there is any sort of leak or spill lng and the gases that it consists of do not explode in an open air environment once lng is delivered the natural gas is allowed to expand and convert back to its gaseous form by reheating a process known as regasification once regasified the natural gas is distributed via pipelines to consumers other major exporters of lng include indonesia nigeria russia and malaysia 3 russia has the world s largest supply of natural gas followed by iran and qatar 4 as of 2020 japan is the world s largest importer of natural gas primarily through increases in lng purchases 5the future of liquefied natural gas lng global demand for lng experienced rapid growth from near zero levels in 1970 to a meaningful market share today 51 of that demand came from china japan and south korea in 2019 5 the lng industry is booming as the world aims to break away from traditional and polluting energy sources such as oil and coal to focus on clean energy mckinsey and company estimates lng demand to increase 3 4 per year till 2035 gas will be the fastest growing fossil fuel with an estimated growth rate of 0 9 from 2020 to 2035 and in 2020 the gas demand decreased by 3 0 while the lng demand grew by 1 0 6 | |
what is a lis pendens | a lis pendens is an official notice to the public that a lawsuit involving a claim on a property has been filed lis pendens is connected to the concept that a property buyer must assume any litigation that exists pertaining to the property if a bank is suing the owner of a lot and a new buyer purchases it the new owner inherits the responsibility of the lawsuit the sale of the property does not prevent the plaintiff from seeking redress via litigation it can represent a contingent liability | |
how lis pendens work | lis pendens is literally translated from latin as suit pending this condition can adversely affect the sale price or the possibility of a sale since any pending litigations are typically unfavorable for the owner the term is commonly abbreviated lis pend lis pendens provides constructive notice or a warning to prospective homebuyers that the ownership of a property is in dispute and litigation is pending lis pendens can only be filed if a claim is related specifically to the property by filing a lis pendens an individual or entity is protecting its claim to the title pending the lawsuit s outcome a lis pendens is only lifted once the lawsuit has been settled because pending litigation can take months and sometimes years buyers are often advised to stay clear of these properties | |
when a lis pendens is used | lis pendens can be used anytime there is a dispute over real property but most of the time it is used in three situations a lis pendens is often filed in divorce cases where the distribution of real estate properties has not been settled it is particularly common in cases where a property is listed in the name of one spouse and the other spouse seeks a portion of the asset the spouse whose name is on the title would have difficulty selling the property under pending litigation lis pendens is almost always used by lenders who have filed a notice of default on a delinquent borrower banks use the procedure to notify the public that a property is in foreclosure other creditors whose debt is secured by property can also foreclose on a property it is not uncommon for lis pendens to arise in contract disputes where a buyer feels they have been wrongly excluded from purchasing a home for example if buyer a and a seller enter into a contract for the sale of a home and the seller decides to sell the house to buyer b buyer a may sue the seller to enforce the sale the buyer can file a lis pendens after filing a lawsuit making it difficult for the seller to sell the house if buyer b proceeds with the purchase and the courts determine that buyer a is entitled to enforce the sale buyer b loses the property to buyer a and must go to the seller to get their money back in some states homeowners associations hoa can place liens against your home for not paying fees or abiding by covenants depending on your state s laws an hoa can file a claim against your home and a lis pendens making it difficult for you to sell it | |
how to file a lis pendens | a lis pendens can only be filed if an action is pending additionally the pending suit must involve real property such as land and buildings if these requirements are not met the notice can be expunged filing requirements vary by state but generally there are two steps first a lawsuit must be filed with the county clerk and the suit must be pending second the lis pendens must be recorded in the county land records so that it can be attached to the property s title filing the lis pendens generally serves as the notice that there is a dispute on the property but the requirements to serve notice also vary by state because lis pendens requirements vary by state you should contact a real estate lawyer in your area to learn if you need to file one and how it is served it is possible to draft a lis pendens yourself based on information you can find online however this is a complex document that uses specific wording one error or mistake can cause it to be expunged so it is best to have an attorney familiar with real estate laws in your area prepare it if you can t afford an attorney you may be able to find public assistance programs in your area that can help frequently asked questions | |
what is the purpose of lis pendens | lis pendens is a legal means for serving notice to anyone concerned with a piece of real estate that there is a claim and pending legal action against the property it is important because it notifies potential buyers that another party has a claim to the property if that party wins a lawsuit a new buyer can lose the property or be held responsible for the claim | |
what does discharge of lis pendens mean | if you receive a discharge of lis pendens it means your property no longer has a claim or lawsuit against it who issues lis pendens anyone who believes they have a claim on a property can file a lis pendens with the clerk of court in the county they live in there must be a pending lawsuit for the lis pendens to be valid | |
what is meant by lis in law | the literal transaltion of the latin word lis is suit or lawsuit pendens translates as pending so lis pendens means pending lawsuit or lawsuit pending the bottom linelis pendens is a notice that a property has a claim against it backed by a pending lawsuit the notice must be filed with the clerk of court for the county you live in and is recorded in the county real estate records a lawsuit must be pending before the notice can be filed and served a lis pendens can be drafted and filed by anyone with an interest in a property but because the language must be specific and it is a complex document it is best to hire a real estate attorney in your area to prepare it for you | |
what is the lisbon treaty | the lisbon treaty also known as the treaty of lisbon updated regulations for the european union establishing a more centralized leadership and foreign policy a proper process for countries that wish to leave the union and a streamlined process for enacting new policies the treaty was signed on december 13 2007 in lisbon portugal and amended the two previous treaties that established the foundation for the european union understanding the lisbon treatythe lisbon treaty was signed by the 27 member states of the european union and officially took effect in december of 2009 two years after it was signed it amended two existing treaties the treaty of rome and the maastricht treaty while these previous treaties set ground rules and tenets of the european union the lisbon treaty went further to establish new union wide roles and official legal procedures the lisbon treaty was built on existing treaties but adopted new rules to enhance cohesion and streamline action within the european union important articles of the lisbon treaty include the lisbon treaty also replaced the previously rejected constitutional treaty which attempted to establish a union constitution member countries couldn t agree on the voting procedures established in the constitution since some countries such as spain and poland would lose voting power the lisbon treaty resolved this issue by proposing weighted votes and extending the reach of qualified majority voting those who supported the lisbon treaty argued that it enhanced accountability by providing a better system of checks and balances and that it gave more power to the european parliament which held major influence in the union s legislative branch many critics of the lisbon treaty argued that it pulled influence toward the center forming an unequal distribution of power that ignored the needs of smaller countries | |
what is listed | a listed company issues shares of its stock for trading on a stock exchange if a company is listed in the u s it has met the requirements of the securities and exchange commission sec for selling shares to the public and has been accepted for trading on an exchange such as the new york stock exchange it is a public company companies that are listed are required to submit quarterly financial statements to the sec and to their shareholders understanding the term listeda listed company is a public company it has issued shares of its stock through an exchange with each share representing a sliver of ownership of the company those shares can then be bought and sold by investors rising or falling in value according to demand a company must apply to an exchange to be listed each exchange sets its own requirements which typically include minimum levels of cash flow and company assets the company also must adhere to the exchange s standards of corporate governance since they are public companies all listed companies are subject to regulation by the securities and exchange commission among other things this means that the company must publish quarterly and annual financial reports 1in order to be listed a company must meet the qualifications set by one of the stock exchanges once a company is listed it must continue to meet those qualifications or risk being delisted benefits of being listedcompanies list on an exchange in order to raise cash the sale of stock on the open market is one way to raise a great deal of money fast in general companies that want to grow and expand have a few ways to raise the money of course individual investors also expect to exert a measure of control over companies whose stock they own ownership of a single share of common stock gives an investor the right to attend a company s annual meeting and vote on the issues raised there listing on a stock exchange gives a company more than access to a piggy bank it can greatly enhance the visibility of the company by drawing the attention of investors and the financial media it also gives a company a way to reward its employees through stock options there are benefits to investors as well the requirements of the exchanges and the regulations of the sec together offer a degree of transparency and accountability in their modern form the exchanges also offer great liquidity and ease of use to stock investors the number of companies listed on the nyse the nasdaq lists about 3 300 initial public offering ipo many ambitious young companies set going public as their first major goal the process toward launching an initial public offering ipo is long and arduous and includes attracting early private investors building refining and testing the product and creating a business plan the company must prepare a package of financial statements to submit to the securities exchange commission for its approval then the company s founders go on the road to sell their plan to institutional investors and the financial media once a company has been accepted for listing on an exchange it can set a share price and a date for its ipo if the ipo is successful the company gets a big wad of cash to invest in its expansion and to reward its founders and early investors once the company is established it can issue new rounds of stock shares from time to time this is usually done to raise money for a specific project it can t be done too often though without objections from existing shareholders who don t want the value of their shares diluted listed vs unlisted companiessome of the biggest brands in america are produced by companies that are privately owned rather than publicly listed some companies bounce back and forth between listed and privately owned status typically as a result of a leveraged buyout by a private equity firm burger king and the jo anne stores chain are examples of companies that have been listed and unlisted some very large companies have never been listed the largest privately owned companies in america include cargill koch industries and the publix supermarket chain 2requirements to be listed on the nasdaq exchangethe nasdaq is a global online stock exchange known for listing some of america s largest technology companies a company can qualify for listing on the nasdaq if it meets the requirements outlined in its 19 page initial listing guide 3 those requirements include the nasdaq also requires companies to meet all of the criteria under at least one of the following standards requirements to be listed on the new york stock exchange nyse the new york stock exchange is the world s largest stock exchange and the oldest in america having been founded in 1792 the nyse requires applicants to meet any one of several financial standards it must meet a set minimum for pre tax income global market capitalization shareholders equity or market value of outstanding shares it also has what it calls distribution standards with minimums set for share price and trading volume among other factors 4questions answers | |
is a listed company a public company | all listed companies are public companies by definition that is they are permitted to list shares of their stock for trading to the public on one of the exchanges they have met the standards of the exchange and are regulated as public companies by the sec can a company be delisted | |
when a company is delisted it could be good news or bad news for investors | a company can be delisted because it no longer meets the standards of the stock exchange that lists it that usually means that the company is failing and its stock has dropped below 1 or so a share these companies often are headed for bankruptcy their outstanding issues may trade as penny stocks in the over the counter market but more often are worthless a notorious current example is sears holding corporation owner of the moribund sears and kmart department store chains delisted from the nasdaq in 2018 it is now sold over the counter under the symbol shldq as of march 11 2022 its share price was 0 0190 and it had a market capitalization of 3 07 million 5a company also can be delisted when a private equity firm or other buyer buys up its shares for a merger a takeover or a private equity buyout in some cases the goal may be to revamp the company and then go public again for example dell computers went public in 1988 and then delisted in 2013 when its founder michael dell and his partners acquired a controlling interest and paid off its remaining shareholders dell dell returned to public trading in august 2016 67 | |
what is an unquoted public company | an unquoted public company is an unlisted company it may trade over the counter or it may have ceased trading altogether unquoted public companies do not qualify for an exchange listing or have been delisted from an exchange unquoted public companies are less heavily regulated than listed companies but more regulated than private companies | |
what is listed property | listed property is tangible property that can be used for both business and personal purposes the internal revenue service irs defines it as passenger automobiles any other property used for transportation and property of a type generally used for entertainment recreation or amusement if listed property is used more than 50 for business purposes it is eligible for special tax deduction and depreciation rules 12understanding listed propertylisted property is a tangible asset owned by a business that can be used for both business and personal purposes if it is used more than 50 for business it qualifies for special tax deduction or depreciation rules the more than 50 can refer to time vehicle mileage or some other relevant measure 3the listed property rules were introduced to prevent people from claiming tax deductions for personal property under the pretense that it was being used in a business or trade businesses are required to keep what the irs calls adequate records of all of their listed property this includes its purchase price and any repair or maintenance costs as well as evidence to substantiate its business use 4examples of listed propertyin its annually updated publication 946 how to depreciate property the irs provides a long list of items that it classifies as listed property they include 5cell phones and similar personal telecommunications devices were once considered listed property but congress changed that in 2010 6 they can still be written off as a business expense to the extent that they are used for business but they are no longer subject to the stricter record keeping requirements of listed property | |
when they file their annual taxes businesses can write off the costs of the tangible property they own in several different ways either as deductions or through one of several depreciation methods | listed property that meets the requirement of more than 50 business use is eligible for a section 179 tax deduction rather than having to depreciate an asset over a period of time a section 179 deduction allows a business to write off all or most of its cost in the year it was placed in service 7 often that will mean the same year as it was purchased the irs sets limits on how large a section 179 deduction businesses can take in any given year for tax years beginning in 2023 the deduction maxes out at 1 16 million for tax years beginning in 2024 the maximum section 179 expense deduction is 1 220 000 8 in addition certain types of property may be subject to their own maximums for example the maximum section 179 deduction for sport utility vehicles is 28 900 again for tax years beginning in 2023 8in addition a section 179 deduction cannot exceed your taxable business income for the year 9 any amount that remains after taking the deduction can then be depreciated 10you can t of course write off the entire cost of an asset if you use it for business only a portion of the time instead that use must be prorated as a percentage the irs offers this simple example may oak bought and placed in service an item of section 179 property costing 11 000 may used the property 80 for business and 20 for personal purposes the business part of the cost of the property is 8 800 80 0 80 11 000 11businesses can claim a section 179 deduction using irs form 4562 depreciationlisted property can also be depreciated over time property that meets the more than 50 test is eligible for the general depreciation system gds an accounting method that allows it to be written off more quickly with larger deductions in the early years if property is used 50 or less for business the business portion can still be written off but only using the alternative depreciation system ads which generally takes longer and spreads deductions out evenly over the years 12listed property that is used more than 50 for business can also be eligible for the special depreciation allowance sometimes referred to as bonus depreciation it allows taxpayers to write off an even greater amount during the first year this allowance applies only to qualified property that was purchased and placed in service after sept 27 2017 and before jan 1 2023 the allowance started at 100 in 2022 and is declining by 20 each year until it reaches 0 in 2027 listed property that is used 50 or less for business is considered excepted property and not eligible 1314defining listed property business useyou can claim the section 179 deduction if the property meets the business use requirement to meet this business use listed property must be used predominantly more than 50 of its total use for qualified business purposes if the property does not meet this requirement it will not qualify for the deduction and straight line under macrs must be used 8there is an exception for leased property the business use requirement does not apply to listed property leased or held for leasing by someone regularly engaged in the business of leasing listed property to be considered regularly engaged in leasing you have to enter into leasing contracts frequently over a continuous period so it has to reflect the normal nature of your business occasional or incidental leasing does not qualify for example leasing just one passenger automobile in a tax year does not constitute being regularly engaged in the business of leasing automobiles however rotating leases that span a fleet of vehicles may similarly an employer charging an employee for the personal use of the employer s property is not considered regularly engaged in leasing the property allocating use of listed propertyto determine if something meets the business use requirement you need to divide its use among different purposes during the year for cars and other transportation use mileage to figure this out find the percentage of business use by dividing the miles driven for business by the total miles driven during the year for other items use the actual time the property is used not just available for example calculate the business use percentage by dividing the hours used for business by the total hours used during the year only count activities like entertainment or amusement as business use if you can deduct the expenses as necessary business costs 8remember that commuting or traveling to work does not count as business use even if you work during the trip a business call made during commuting or on a personal trip does not change the trip to business travel if someone else uses your car it s not business use unless it s directly connected with your business reported as income or you are paid fair rent employee use of property is considered business use only if it is required for the job and the employer s convenience 8can employees deduct listed property according to the irs employees can claim a depreciation deduction for the use of your listed property whether owned or rented in performing services as an employee only if your use is a business use in addition the use must be for the employer s convenience and required as a condition of employment 15 | |
what is mixed use property | the term mixed use property is sometimes used as a synonym for listed property however it is more common in the field of real estate often referring to a building with both commercial and residential tenants can i deduct commuting mileage no commuting mileage which is the distance traveled from home to work and back is not deductible business mileage only includes trips made for business purposes other than commuting | |
what are the record keeping requirements for listed property | the irs requires detailed records such as mileage logs for vehicles or usage logs for other items to substantiate the business use of listed property these records should include the date purpose and amount of business use | |
what is recaptured depreciation | recapture is a process through which the irs gets back some of the money it previously allowed the taxpayer to deduct through depreciation for example when a taxpayer takes depreciation deductions for an asset that reduces their cost basis in the asset if they later sell the asset for more than its cost basis they can owe tax on that profit in the case of listed property if the taxpayer claimed a section 179 deduction for a particular asset they may be subject to recapture if their business use of it falls to 50 or less at any time during that asset s recovery period 16 the recovery period is the number of years over which an asset would normally be depreciated under irs rules an automobile for example has a recovery period of five years under the general depreciation system 17the bottom lineknowing what the irs considers listed property managing that property s business vs personal use and keeping careful records can help a business maximize its tax deductions and get the greatest financial benefit from its assets | |
what is a listed security | a listed security is a financial instrument that is traded through an exchange such as the new york stock exchange nyse or nasdaq a listed security may be a stock bond or a derivative these listed securities can be bought and sold on the open market private companies that go public must choose an exchange where they plan to be listed and meet its listing requirements companies that issue stock launch their listing through an initial public offering ipo understanding listed securitiesas noted above a listed security is any financial instrument that can be bought and sold on an exchange listed securities may be bonds or stocks they may also be more complex assets such as derivatives these securities are vital as they provide much needed liquidity to the financial markets they also help connect buyers and sellers there are several steps and requirements that issuers need to meet before they can list their securities on an exchange like the nyse or the nasdaq the following are the general steps they must take after the ipo is complete trading begins on the secondary market companies that are listed must follow through with regular filings and continue to meet the exchange s financial requirements if the company fails to comply with these conditions its security will be delisted delisted securities that can no longer be traded on an exchange may trade over the counter the over the counter otc market does not have listing requirements listing requirements vary by exchange and include minimum stockholder s equity a minimum share price and a minimum number of shareholders exchanges have listing requirements to ensure that only high quality securities are traded on them and to uphold the exchange s reputation among investors types of listed securitiesstocks are among the most common listed securities companies that want to list their shares must go through the ipo process which means selling shares on the primary market this process involves creating a plan to go public completing all the necessary paperwork and hiring an underwriter to oversee the process once the ipo is completed trading can begin on the secondary market while an ipo is reserved for institutional investors the secondary market is where investors and traders buy and sell their shares this arena not only allows small investors to participate in the financial market but it also gives the market liquidity bonds are debt securities companies that issue bonds essentially borrow money from the investor the investor buys a bond for the face value the principal amount in exchange they receive their principal investment and interest at regular intervals and or at maturity bonds are issued by governments and corporations they allow issuers to raise money for different reasons including funding new purchases or growing their business since they are loans the issuers must repay their investors also known as bondholders and creditors regardless of whether they earn a profit a derivative is a complex financial security it is financial contract that is traded over an exchange the value of the contract is dependent on the value of the underlying asset which can include commodities currencies options or futures contracts are agreed upon by two parties the buyer and seller listing securities on the nasdaq is considerably less expensive than listing on the nyse as such newer companies often opt for the nasdaq if they meet its requirements fees are based on a listing company s outstanding shares 1requirements to become a listed securitythe exchange a company chooses can affect how investors perceive the stock some companies choose to cross list their securities on more than one exchange we ve listed some of the basics of listing a security on the nyse and the nasdaq below keep in mind that listing requirements for other exchanges may differ companies that want to be listed on the nyse must go through several steps if a new listing is an ipo the nyse requires a guarantee from the ipo underwriter that the ipo will meet the board s standards 3the listing process can take anywhere from four to six weeks companies that want to list their securities must these steps can be done on paper or electronically online 4just like the nyse issuers must meet the requirements of the financial market to which they apply for instance the requirements vary between the nasdaq global select market the global select market the nasdaq global market and the nasdaq capital market these conditions include market cap market value market makers and total assets among others 5 | |
what is the world s largest exchange | the new york stock exchange is the world s largest exchange by market capitalization as of september 2023 the nyse had a market cap of 25 24 trillion it is followed by the nasdaq 20 58 trillion and the shanghai stock exchange 6 6 trillion in china 6 | |
why would a company want to list its shares on an exchange | the main goal of listing a stock on an exchange is to raise money going public and allowing investors to buy and sell shares can help companies raise enough capital to meet their financial needs including growing their business or paying off their debts by selling shares on an exchange the company gives investors equity in the company | |
what are pink sheets | pink sheets is a term that was used to describe stocks traded over the counter as such these stocks don t trade on an exchange the otc market is decentralized and companies are not required to meet listing requirements these companies are often small and or up and coming companies the bottom linelisted securities are any financial instruments that are publicly traded on an exchange this includes the stocks and bonds you buy and sell as well as derivatives that experienced traders and investment companies trade the path to becoming listed takes time and preparation issuers must file paperwork hire personnel and take other steps so they can begin trading companies must also choose and reserve a ticker symbol it is an important part of their branding and can help investors identify them in the financial markets |
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