Market liquidity issues could create profit opportunities
10/01/2015 01:01PM ● Published by Katelyn Nelson
First, what is a bond? A bond is simply a promise to pay principal and interest on a loan. You can “own” a bond, just like a bank might “own” your mortgage note. When you own a bond, you own the rights to receive the principal and interest payments, just as a bank does on a mortgage note. This is subject to the ability of the issuer to make those payments. There are many variations of the dollar amounts and payment terms that different bonds have. When you own a bond, you can sell your rights to the payments and receive the market price for the
Market liquidity is basically the ability to buy or sell an investment, such as a bond, quickly and without affecting the price. In a highly liquid market, there are many buyers and sellers. You would be able to buy or sell a reasonably large amount of investments quickly without significantly changing the price of the investment. In an illiquid market, there are fewer buyers and sellers. Buying could cause the price to increase, and selling could cause it to decrease. It could also take more time than usual to sell.
As I mentioned in a recent article, one characteristic of bonds is that when interest rates rise, the price of some bonds fall. In an illiquid market, an increase in rates might cause a larger drop in prices than would normally occur in a liquid market. For those who hold bonds, this could present significant risk. For those who are waiting to buy, this could present more of a buying opportunity than usual. Be sure to evaluate all of the potential risks and benefits of the particular situation. Keep in mind that a lack of market liquidity can involve significant risk
A lack of liquidity can be a problem for some, but can present profit opportunities as well. It is
October is National Bullying Prevention Month. Food for thought… A bully is a coward with
All the best to you!