Ability to sell
What is the ability to sell?
The ability to sell is the ease with which you can turn your investment quickly into cash at or near its current market price. Another name for the ability to sell is liquidity
. Cash is the most liquid asset you can hold.
Some investments (like mutual funds) offer liquidity by allowing investors to sell their investment back to the issuer on short notice. For other investments, liquidity depends on whether the investor can find a buyer on the open market. Listing on a stock exchange will usually make sales easier, but does not guarantee liquidity. In some cases, your ability to sell an investment may be restricted by law or contract (for example: private companies, real estate, and promissory notes). An asset that seems to be highly liquid today could become highly illiquid tomorrow because of changing market conditions and perception.
What is important about ability to sell (market liquidity)?
A liquid asset can be sold rapidly, with minimal loss in value, anytime within market hours. You need to know if what you are buying is a liquid asset.
If it is not, you may have to hold on to an illiquid asset that is losing value, sometimes until it has no value at all. The asset may not be saleable due to uncertainty about its value or lack of a market in which it is regularly traded.
Factors that affect your ability to sell:
- Market conditions – changing conditions affect the value of your asset. Sometimes your asset may be too pricey. If the price is falling, investors may not want to buy it at that moment
- Lack of a market – it may be hard to sell an asset that’s not frequently traded. Some sectors are traditionally thinly traded
- Uncertainty about value – it’s hard to determine the value of some assets, such as the assets of private companies. This can make buyers nervous and the asset more difficult to sell
- Maturity date – some assets, like many bonds, scholarship plans and GICs can’t be sold until they mature. Even if you can sell them, you may have to pay penalties or you won’t get your full return