Trading volume has been exploding pushing exchange systems to the limit as institutional and retail investors try and fit through one small door. Liquidity matters for everyone from the largest exchange to the smallest stock, these publicly traded securities allow investors to enter and exit the markets. During these volatile times, this liquidity will define the long term brand for the security itself – investors will recall the day where they were stuck in investment and never return if they pay too large a toll to exit.
They call this the “market impact” to enter and exit. This liquidity measure along with VWAP or the Volume Weighted Average Price is the metric professionals use to determine if they can make ANY investment in the asset/security – if these liquidity minimums are not met – they pass on the investment, which is the worst-case scenario for the company listing their public shares.
Market making is a business like any other, and in a Covid-19 world, every market maker is working from home hoping the security they have will hold up. Technology has advanced over the years, and Wall Street itself is operating fairly efficiently through the total shut down of many business and operations.
Make sure you check the liquidity in whatever you choose to invest in if you cannot exit, it is not a real investment. It is easier to enter markets than exit them, and shares fall 10x faster than they rise. These market axioms for professional traders rarely apply to long term holders. They don’t matter until they do. They matter when you need the money to pay hospital bills, or the rent or utility bill. Liquidity matters in 2020 more than ever, and make sure you weigh this factor equally with the upside potential and other risk factors. Volatile markets make us stand back and ask the right questions so we can learn how to make better investment decisions each time we commit our capital to any publicly – traded security.