What is illiquid stocks?

Stock market experts always talk about liquidity on every platform because there are two types of stocks available in the stock market – Liquid stocks and illiquid stocks.  in this post let’s talk about what is illiquid stock?, difference between liquid & illquid stocks and illiquidity.

What is Illiquid stocks?

Illiquid stocks are high-risk investments that are difficult to sell due to values, an absence of potential bidders and other reasons. Real estate, shares with limited trading volume, and collectibles are forms of illiquid assets.

Illiquid assets have worth and, in many situations, a quite higher value but they are difficult to sell. Due to the limited trading of illiquid shares, shareholders are unable to locate available bidders.

With fewer shareholders, illiquid shares have weaker trading quantities. They typically consist of low quantities that cannot be sold easily.

Now that you understand what is illiquid stock, let’s look at how to recognize it.

How to recognize Illiquid stock?

1. When institutional investors lose faith in a share, it indicates a poor return on investment

2. If a share does not have appropriate trading activity on a regular basis, it is likely to become illiquid.

3. If a stock’s price drops on a daily basis it’s a sign that it’s illiquid.

4. If there is a significant price gap among the bid and the offer price the stock is likely illiquid.

illiquid stock Example

There are many companies in this category to name a few : Bsel Infrastructure realty ltd, Gayatri Sugars Ltd, Royal India Corporation Limited and Triveni Glass Ltd.

You can find the illiquid stocks list by clicking here.

Investing strategy for illiquid stock

Let’s say you purchased a stock at INR 100 per share and it took off like a rocket, rising to INR 800 in a matter of years. You made the decision to take advantage of this fantastic opportunity.

On the day you wanted to sell the shares, you discovered that there were very few bidders in the market and the highest value you could get was INR 795. Is there something that would worry you? Almost certainly not.

What is the reason for this? Because a few basis points here and there don’t matter while you’re standing on a 700% gain. Finding a business that can produce those kinds of profits is what matters most in investing.

Difference between liquid & illiquid stocks

Important things to remember about Illiquid stock and assets

Illiquid stocks are those that have low trading volume and can’t be traded right away. In comparison to liquid assets, illiquid assets have a higher yield but are more difficult to sell. And if a fast sale occurs, it will not be without a significant loss of value.

These assets and securities are difficult to turn to cash. A further factor that illiquid assets can be difficult to trade is that there is little trading volume or demand in the stock, as shown by a shortage of available and interested buyers.

Illiquid stocks can have lesser trading frequency, broader bid-ask ranges, and stronger market uncertainty as a consequence of this.

Illiquidity

Illiquidity in a firm refers to a firm’s inability to meet its debt commitments due to a lack of cash flow. To escape bankruptcy, a corporation may need to liquidate these assets in the event of bizarre situations or an emergency scenario.

If this occurs rapidly, it would be able to sell assets at rates much less than what a realistic market value will be.

Real example of illiquidity

Companies and people alike can find themselves unable to pay their creditors due to illiquidity. According to The Economic Times, Jet Airways has deferred repayment of foreign debt for many times in 2019 owing to a corporate illiquidity problem that has left the firm unable to reach liquid funds.

As a consequence, Jet Airways had to ground more than 80 airplanes and put together a resolution plan that included the removal of its chairman, Naresh Goyal, and a vote by the board to enable lenders to gain ownership of the carrier.

Conclusion