Liquidity is the answer to the question: ‘How easily can I sell this investment for its market price?’
If you had to fake your own death in two days’ time, how much cash could you scrounge up to take with you to your new life in Bali? You could take all the money in your bank accounts and probably your shares – but none of your property equity or term deposits. It all depends on the liquidity of your investments.
What influences liquidity?
Liquidity depends on several factors:
- How easily you can sell the investment – is there a marketplace to sell it?
- What’s the demand – will lots of people want to buy it, and be able to buy it?
- Is it fungible – is it worth the same amount to everybody or does it depend on their personal passion for this type of item?
- Will you lose money – if you had to sell in a hurry, would you get the market price or would you have to take a discounted price?
- How complicated it is to sell the investment – can it be done quickly or will there be a massive amount of hassle and paperwork?
From highly liquid to highly illiquid
Here are some examples of various investments and their liquidity:
|You can use it immediately, trade it instantly, and everybody wants it.
|You can easily sell it for the market price, but it’s not cash.
|Stocks and bonds Shares
|You can sell it fairly easily, but it takes time and there are some hoops to jump through.
|A limited market; you need to find the right buyer to get the full value.
|NFTs and artwork
|Hard to sell – it will take time and considerable effort to find the right buyer.
|Privately owned businesses
How liquid is your portfolio?
Liquid assets are your safety net. It’s why every financial adviser will tell you to have an emergency savings account, ready whenever you need it. When you need money fast, to repair your fridge or car, for instance, you can pay immediately without having to sell or borrow.
Part of the value of any investment is its liquidity. The longer your money is tied up, the higher the potential returns need to be to justify this loss of liquidity. That’s why term deposits are laddered according to time: the longer the term, the higher the interest rate.
Lack of liquidity is what makes it complicated to buy a house with three friends – how do you sell quarter of a house if you decide you want out? It’s similar with privately-owned businesses and some peer-to-peer lending products; low liquidity reduces the value.
But keeping all your funds in cash would obviously be a poor financial decision, because cash earns almost nothing and its value is rapidly being eroded by inflation. Some illiquid investments can have very high returns in the long run, such as privately-owned businesses.
A secondary market for Zagga loans
Zagga have launched a secondary market for Zagga loans which will increase the liquidity of your investment. It means that if you want to sell your investment in a Zagga loan before the term is over, you can list it on our secondary market and sell it to another investor. The returns for the new owner will be the same as for the old owner – the terms and conditions remain the same.
There will be some advantages to buying loans on the secondary market. You won’t need to wait for the loan to be 100% funded, it will be available immediately. You’ll also have more history and information on the loan since the borrower will already have been making repayments for some time. You might find this gives you more confidence that they will keep paying. However, the loan term will only be whatever is left when the original investor sells, so you won’t make as much as if you bought in initially.
If you would like to know more about our secondary market, do get in touch and we’ll be happy to talk to you about all the potential risks, benefits and opportunities.