liquidity

April 1, 2022 mirozecevicmmg

The ease with which you may sell an investment or asset at a reasonable price is referred to as liquidity.

Liquid assets are those that can be exchanged for cash:

Quickly and easily
With little or no transaction fees
At their current market prices (i.e., without having to entice a buyer with a big discount)

Something is more liquid in general if:

Many individuals would be interested in purchasing it;
It’s simple to determine its value;
It’s simple to transfer ownership from one person to another;
The object or investment is more standardized (i.e., less unique)

A share of Apple stock, for example, is liquid because it’s simple to buy and sell, and many people would want to possess it at the proper price. You can figure out how much it’s worth by looking at the stock market’s current pricing. Furthermore, the corporation has billions of outstanding shares, therefore it isn’t unique.

A piece of custom-designed luxury real estate, on the other hand, is illiquid since there may be only a few potential purchasers, it’s difficult to agree on exactly how much it’s worth, and the transfer procedure can take a long time.

Liquid

Stocks
Bonds
Mutual funds
Exchange-traded funds (ETFs)

Illiquid

Real estate
Art
Antiques
Collectibles, like coins, stamps, or baseball cards

Because you may easily convert cash into other assets, it is the most liquid asset.
Money market accounts and funds, savings accounts, and various forms of very short-term debt investments are all examples of “cash equivalent” investments. (Certificates of Deposit or CDs are a little less liquid since they lock your money up for a certain length of time and charge a fee if you need to withdraw it early.)

While there’s nothing wrong with retaining illiquid assets, people and businesses both benefit from having some liquidity.

For day-to-day needs or unexpected obligations, you’ll need some liquid assets. If your sole asset is a house, selling it immediately for a fair price to fund a car repair would be difficult.
Liquidity is required by businesses to fund short-term costs and maintain financial stability. If the company’s revenues are hit hard by a sudden economic downturn, having adequate cash on hand might help it get through it.

Liquidity refers to how quickly and easily an item may be sold for a reasonable price. Stocks, bonds, and ETFs (exchange-traded funds) are all liquid assets that are simple to sell. Real estate and fine art, for example, are illiquid assets that are more difficult to convert into cash. It is critical for both individuals and businesses to have sufficient liquid assets in order to pay short-term payments and cover any unforeseen expenses or financial difficulties.

Key points:

Liquidity refers to how quickly and easily an item may be sold for a reasonable price.
Although cash is the most liquid asset, equities, bonds, mutual funds, and exchange-traded funds (ETFs) are all considered extremely liquid. Houses, coin collections, and art are all illiquid because finding a buyer willing to pay a fair price takes time.
While having some illiquid assets is acceptable, you should balance them out with liquid assets that you can sell quickly if you need cash.

Liquidity text on wood block with a pile of coins on a blue and white background

The SEC’s new plan might be a significant gain for day traders

February 16, 2022 mirozecevicmmg

Have you ever traded penny stocks with a small account only to be frustrated when it came time to make another trade? Many people who invest in small-cap stocks are concerned by the Pattern Day Trade regulation.

To purchase and sell penny stocks or higher-priced stocks within a single day and more than three times during a rolling 5-day period, traders must have at least $25,000 in their trading account. In many circumstances (depending on your broker), you may avoid this by using a cash account.You can make as many day trades (buying and selling in the same trading session) as you like.However, you can only use the amount of settled funds in your account.

You must be mindful of settlement time-frames if you trade penny stocks.Your money will usually be settled two business days following the trade date (T+2).That implies you’ll have to wait a few days after selling out of your transaction before you may trade with those funds again. The “benefit” is that you are “forced” to refrain from over-trading.

On the other hand, you won’t be able to profit from market volatility as rapidly as you’d want.
If you’ve ever day traded with a smaller account, you’re all too familiar with this problem. However,
the US Securities and Exchange Commission (SEC) may be attempting to assist ordinary traders.

The Securities and Exchange Commission (SEC) submitted a document explaining a
potential adjustment to this settlement regulation earlier this month.

The SEC agreed to recommend rule changes to lessen risks in clearing and settling securities.
Shortening the normal settlement cycle for “most broker-dealer transitions” in securities is one technique to do this.The shorter settlement involves switching from a T+2 (two business day) to a T+1 (one business day) settlement time. The changes, according to the Commission, are intended to reduce “credit, market, and liquidity” risks in transactions.

This might be a huge gain for day traders, particularly those with smaller accounts who don’t qualify as “day traders.” Trading options is one of the few strategies to accomplish a T+1 settlement.
However, options have a higher volatility and numerous other elements, such as time decay, that work against them. With a planned T+1 settlement for securities deals, investors wishing to get into the market might do so considerably more quickly.

The SEC’s document explains what this means for “self-directed” or retail traders. Recent events, in particular, motivated these decisions, according to the white paper:

“Accelerating Time to Settlement” and “Settlement Optimization.”59 Among other things, the DTCC-owned clearing agencies have been exploring steps to modify their settlement process to be more efficient, such as by introducing new algorithms to position more transactions for settlement during the “night cycle” process (which currently begins in the evening of T+1) to reduce the need for activity on the day of settlement. Portions of these two initiatives have been submitted to the Commission and approved as proposed rule changes.”

In addition, the SEC’s document discussed: “More recently, periods of the increased market volatility—first in March 2020 following the outbreak of the COVID-19 pandemic, and again in January 2021 following heightened interest in certain “meme” stocks—highlighted the significance of the settlement cycle to the calculation of financial exposures and exposed potential risks to the stability of the U.S. securities market.”

The DTCC’s February 2021 document discussed how speeding up settlement beyond T+2 may “provide considerable benefits” to market players, which sparked this debate.
The DTCC predicted that a T+1 settlement strategy would be implemented in the second half of 2023, and that this form of settlement cycle would reduce the volatility of individual margin needs by “up to” 41%.

When it comes to penny stock investing, everyday patterns change swiftly. As a result, a shorter time to clear might provide market players with opportunities to be more systematic in their approach. The DTCC, the Securities Industry and Financial Markets Association, and an Industry Steering Committee released a T+1 Report late last year describing the proposed transition to a T+1 standard by 2024’s second quarter. Furthermore, an Industry Working Group looked at the possibility of a T+0 settlement. While this may be at the bottom of the priority list, it is still being discussed. Is it possible that traders will have a 0 settlement timescale for deals in the future?

Summary

The Securities and Exchange Commission (SEC) is considering rules that would reduce the usual settlement cycle for most broker-dealer transactions from two to one business day following the trade date (T+1).
In order to protect investors, minimize risk, and improve operational efficiency, the SEC proposes additional standards for broker-dealers, investment advisors, and certain clearing agencies to execute institutional trades.
Compliance with a T+1 standard settlement cycle would be needed by March 31, 2024 if the bill is passed. The SEC is also considering whether a same-day standard settlement cycle (i.e., settlement no later than the end of the trading date, or T+0) should be required.

Financial Ratio for Stock Picking

February 8, 2022 mirozecevicmmg

Liquidity Ratio

This ratio indicates how rapidly a corporation can turn its present assets into cash in order to pay down its liabilities on time. Liquidity and short-term solvency are frequently used simultaneously.

Current Ratio

The current ratio compares a company’s capacity to pay down current obligations (those due within one year) with its total current assets, which include cash, accounts receivable, and inventory. The better the company’s liquidity condition, the higher the ratio:

Current Ratio = Current Liabilities / Current Assets

Quick Ratio

The quick ratio, which removes inventory from current assets, assesses a company’s ability to satisfy short-term obligations with its most liquid assets.

Quick ratio= (C+MS+AR) / CL

C – cash & cash equivalents
MS – marketable securities
AR – accounts receivable
CL – current liabilities

Another way is: Quick ratio = (Current assets – Inventory – Prepaid expenses) / Current liabilities

Efficiency ratio

The efficiency ratio is commonly used to assess how well a corporation manages its assets and liabilities inside the organization.

Asset Turnover Ratio

The asset turnover ratio compares the value of a company’s assets to the value of its sales or revenues. The asset turnover ratio is an indicator of a company’s ability to earn revenue from its assets.

Asset Turnover = Total Sales / (Beginning Assets + Ending Assets) / 2

Total Sales – Annual sales total
Beginning Assets – Assets at start of year
Ending Assets – Assets at end of year

Inventory Turnover Ratio

The pace at which a corporation replaces inventory owing to sales in a particular period is known as inventory turnover. Inventory turnover calculations assist companies in making better pricing, production, marketing, and purchasing choices.

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory

Average Collection Period

In terms of accounts receivable (AR), the word average collection period refers to the time it takes for a firm to obtain payments due by its customers. The average collection period is used by businesses to ensure that they have enough cash on hand to satisfy their financial obligations.

Average collection period = (AR * Days) / Credit sales
AR – average amount of accounts receivable
Credit sales – total amount of net credit sales in the period

How SEC regulates stock market?

September 3, 2021 mirozecevicmmg

Securities and Exchange Commission (SEC) is independent U.S federal agency that regulates the stock market. It was created in 1934 by Congress to help restore investor confidence after the 1929 stock market crash. The Securities Exchange Act of 1934 was created by Securities and Exchange Commission. It govern securities transaction on the secondary market relying on Securities Act of 1933 which increased transparency in financial statements and established laws against fraudulent activities. In essence SEC provides transparency by ensuring accurate and consistent information about companies that allows investors to make informed and sound decisions. Without transparency stock market would be vulnerable to market speculation and creation of asset bubbles.

Securities and Exchange Commission has five commissioners and five different divisions:
Division of corporate finance – review corporate filing requirements ensuring that investors have complete and accurate information on company’s financial health that will help them make the best decision.
Division of investment management – regulates investment companies, variable insurance products and federally registered investment advisers. It also oversees The Securities Investor Protection Corporation (SIPC) that insures investment accounts in case that brokerage firm goes bankrupt.
Division of Enforcement – enforces SEC regulations by investigating and prosecuting violations of securities laws and regulations.
Division of Trading and Market – establishes and maintains standards that regulate the stock market. It oversees securities firms and exchanges as well as industry’s self regulatory organizations.
Division of Economic and Risk Analysis – economic data and risk analysis to other division in order to integrate them in the core mission of SEC. This division predicts how proposed rules would affect market.

United States stock market is one of the most regulated markets in the world with high level of transparency which attracts many business to the United States. SEC’s monitoring of exchanges and all organizations connected with selling of securities has a big role in creating such highly regulated market. It is fairly easy to take your company public in the U.S which helps companies grow larger at a faster rate. By conducting research in financial literacy SEC found out that average investor doesn’t poses enough knowledge about the way market and economy function. That is the reason why SEC is so protective of ordinary, non-accredited investors through its regulations. It makes safe for average investor to buy stocks, bonds or mutual funds by regulating sale of those securities and providing investors with information that will help them make investing decisions.