Ghost (????????????????????????) busters – edition 3
In this edition, we focus on one of the most important terms in finance: liquidity. This isn’t just useful in your investing journey, but is a key part of any personal finance decision like buying cars or houses. We will just scratch the surface of this concept.
We also touch on the development board of the JSE: the AltX.
Liquidity is all about how easy it is to sell something or access its value.
For example, money in the bank is as liquid as it gets. It has a defined value and can be used immediately. A fixed deposit or money market account would be next in line. There’s a defined value, but you might have to wait a bit to access the funds.
So, liquidity is really a measure of two things:
- How quickly can something be turned into cash?
- How much value is lost in the process?
At the other end of the spectrum would be a residential property in a tough market. Not only would it take many months to sell, you would probably have to accept an offer well below your asking price.
The concept applies to cars, too. It’s a lot easier to sell a Toyota or a VW than it is to sell one of the more unusual brands. I speak from experience.
In the world of listed shares, liquidity also matters. Large companies on the JSE are highly liquid, so you can easily sell your shares quickly at close to the quoted market price. Small companies aren’t so easy to sell. If you look at a share price chart and there are several days in a row where the quoted price hasn’t changed, it’s an illiquid share. Be careful investing in it.
Liquidity has an impact on valuation, but that’s a topic for another day.
The JSE has hundreds of listed companies. Not all of them are large companies with multi-decade track records.
On the Main Board, you’ll find all the names you know. You’ll also find plenty of names you don’t know, especially outside of the top 80 or so companies.
On the AltX (Alternative Exchange), you’ll find a variety of other companies that are too small or too new to qualify for the Main Board. The AltX is a great example of a development board, designed to give companies a place to list and access capital in a less stringent environment.
Unfortunately, many companies start on the AltX and never get further than that, opening a lot of debate around whether listing is the right strategy vs. remaining a private company and looking for investors. There are exceptions though…like Capitec, easily the best AltX success story of the lot.