When handling money, you should be aware of your liquidity situation. Liquidity is generally what enables you to use opportunities. If you have too little liquidity, you'll be forced to react to your environment. Folks who are heavily leveraged or are too exposed to illiquid assets will most likely get caught in liquidity traps.
For example, people who carelessly buy securities on margin will get a margin call if their investments' valuations fall under a minimum point. In this circumstance, the brokerage firm will automatically begin selling off stocks and bonds to fulfill the maintenance margin requirement. This presents a couple of major problems. The initial issue is clear. The person was totally invested in investments that were falling in value.
The other dilemma is much less discussed. When investment prices drop, they can regularly be acquired at reasonable prices. If you were too leveraged or fully invested, you have no cash to invest. In addition, the values of your investments are likely to come back over the course of time assuming that you made logical investment selections. If the investments that cause you to get a margin call come back over time, then you were probably compelled to sell your assets at a lowpoint. By keeping some liquid assets, you might have gotten through the lows and would be much better off financially.
Sure, you can sell other assets assuming your other assets are liquid. Many are not. For instance, rental properties can take a considerable time to sell. Hence if you've got a great investment opportunity, you may not be well placed to get rid of a rental property in time to make the deal happen. Sometimes your largest losses are the opportunities you could not take advantage of.
Not only have you got to be cautious of how much leverage you have through incurring debts, but also you have got to avoid having most of your investments tied up in one business, investment property, or any other non-liquid investment. Return yields, volatility, and other statistics get talked about more often than liquidity. However, that does not make liquidity less important.
Many startups overlook liquidity when managing growth. If they grow too quickly, they might be putting themselves at risk. Naturally, the demon is in the details. For example, they may be selling expensive fresh products and not being totally compensated in cash at the exact same time. Outlets and middlemen regularly take thirty days or even more to pay. Meanwhile, the new start up had to purchase raw materials, pay for labor, and pay for fixed costs. Since these expenses have to be paid prior to receiving the income from the sale, growing startups need to manage their expansion carefully.
For example, people who carelessly buy securities on margin will get a margin call if their investments' valuations fall under a minimum point. In this circumstance, the brokerage firm will automatically begin selling off stocks and bonds to fulfill the maintenance margin requirement. This presents a couple of major problems. The initial issue is clear. The person was totally invested in investments that were falling in value.
The other dilemma is much less discussed. When investment prices drop, they can regularly be acquired at reasonable prices. If you were too leveraged or fully invested, you have no cash to invest. In addition, the values of your investments are likely to come back over the course of time assuming that you made logical investment selections. If the investments that cause you to get a margin call come back over time, then you were probably compelled to sell your assets at a lowpoint. By keeping some liquid assets, you might have gotten through the lows and would be much better off financially.
Sure, you can sell other assets assuming your other assets are liquid. Many are not. For instance, rental properties can take a considerable time to sell. Hence if you've got a great investment opportunity, you may not be well placed to get rid of a rental property in time to make the deal happen. Sometimes your largest losses are the opportunities you could not take advantage of.
Not only have you got to be cautious of how much leverage you have through incurring debts, but also you have got to avoid having most of your investments tied up in one business, investment property, or any other non-liquid investment. Return yields, volatility, and other statistics get talked about more often than liquidity. However, that does not make liquidity less important.
Many startups overlook liquidity when managing growth. If they grow too quickly, they might be putting themselves at risk. Naturally, the demon is in the details. For example, they may be selling expensive fresh products and not being totally compensated in cash at the exact same time. Outlets and middlemen regularly take thirty days or even more to pay. Meanwhile, the new start up had to purchase raw materials, pay for labor, and pay for fixed costs. Since these expenses have to be paid prior to receiving the income from the sale, growing startups need to manage their expansion carefully.
About the Author:
To learn more about the need for liquidity in investing check out the Eileen Jacobs's blog. Eileen E. Jacobs is a mortgage consultantfrom Las Vegas, Nevada. loan officer Las Vegas
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