In general it has been observed that investors generally want to have easy and higher liquidity from the shares they buy. Should it be so, if considered from the point of view of small investors, and that too, in a stock market in developing country,and we the markets are not fully efficient.
In stock markets of developing countries, small investors are exposed to the risk of minority expropriation as the institutional quality tends to be lower. High liquidity shares may be a useful protection device against such risk. If such risk occurs, investors will tend to sell their shares leading to a decrease of stock price turning the share into a low liquidity share. Managers of firms with high liquidity shares will have strong incentives to perform well in order to maintain the liquidity and the price as high as possible.
A search on "Liquidity Risk Premium" should prove fertile, and relative to Mr. Stef's note above, and any e.m. governance related literature may prove useful --particularly work that intersects with behavioral studies. I would like to believe that investors with longer time horizons would seek to harvest the liquidity premium (i.e. do the research and take on relative illiquidity), but could certainly see the investor (as a generalized group) being inclined to higher liquidity for the reasons Mr. Stef raises above -- either by design (i.e. pursuing a higher frequency strategy that requires liquidity) or bias.
That depends, Sanjeev Bansal I suppose you have experience with finance literature So that stock preferences depend on investors' risk aversion. Risk seeker could prefer high-gain and fewer liquidity stocks, meanwhile, income seeker investors look for fixed income securities with high capability for liquidating.
Absolutely. Stocks with limited liquidity are difficult to sell out and equally difficult to know their real worth!
I probably differ in my answer than most. While liquidity is sought by investors, too much liquidity proves towards high volatilty. One of the reasons that most venture backed companies now wait until they reach unicorn value before an ipo, if ever. Given the depth and breadth of the private, unregistered market, theres enough capital to raise larger sums and not be subject to repricing and revaluing on a second by second basis. Investors dont see a share price eroding just because of a single statement that more liquid stocks might experience.
- Badges
- Science topic
- Similar topics
- Biological Science
- Bioecology
- Systems Ecology
- Landscape Ecology
- Connectivity