Investment Success: Leverage Liquidity to Your Advantage 2023

 

The investment approach in fundamental principle is to look for liquidity when trading volatility. Investors and traders often benefit

significantly more from assets with a high degree of liquidity than those with a lower level of liquidity. 

Investment-related fields

On a broad scale, this similar concept can be utilized in other investment-related fields. Investors, for instance, are probably much

more likely to feel at ease buying a home in a place with a dense population than in one with a sparse one. When there are more

typical transactions per year and more people looking, it is much simpler to sell a home.

 

The world of possibilities can be  governed by the same rules. Trading high volume investment  options has a number of

additional significant benefits as well. A recent Best  Practices article is a great place to start if you want more details on this

subject.

 

On the show, the hosts highlight some of the most important liquidity filters that traders can use when selecting the appropriate

underlying, including: High volume (across strikes,High open interest (across strikes), A tight bid-ask spread, Multiple expiration

cycles, Numerous strikes

 

Cost to buy an option

In the Philippine Stock Exchange (PSE), liquidity plays a crucial role in investment success. One of the most significant advantages of trading highly liquid stocks is the compression of the bid-ask spread, which helps investors minimize losses and maximize potential gains.

The bid-ask spread refers to the difference between the price at which you can buy a stock (the ask price) and the price at which you can sell it (the bid price).

How Liquidity Affects Trading Costs

For example, if a stock in the PSE has a bid price of ₱50.00 and an ask price of ₱50.30, the bid-ask spread is ₱0.30. If we assume that the fair market value of the stock is at the midpoint, ₱50.15, an investor who buys at ₱50.30 is already at a disadvantage, as they have overpaid by ₱0.15 per share.

On the other hand, an investor selling at ₱50.00 is also losing ₱0.15 from the fair market value. This means that trading illiquid stocks with wider bid-ask spreads can significantly impact returns, as investors may need to buy at a premium or sell at a discount.

Why Liquidity Matters in the PSE

Stocks with higher liquidity typically have smaller bid-ask spreads, reducing the cost of entering and exiting positions. This allows traders to maximize profits and minimize losses when making investment decisions.

For investors in the Philippine stock market, focusing on highly traded stocks—such as blue-chip companies listed in the PSE Index (PSEi)—can help reduce transaction costs and improve overall investment performance.

By understanding how liquidity impacts trading costs, investors can make more informed decisions, ensuring that they leverage market conditions to their advantage.

 

Crucial factors Liquidity

One of the most crucial factors in determining opportunities in a market is liquidity. Liquidity is fundamentally the result of traders’

opinions on the market being expressed collectively.

 

These opinions are reflected in a futures market, like any other market, by open investment  interest, or by buy or sell orders that

have been conveyed to the rest of the market but have not yet been filled. The important thing to remember is that the more

opinions that are expressed in the market, the more liquid the market is, regardless of the quantity and cost of these orders.

 

 

Because more participants and opinions are expressed on the market, the more likely it is that a single trader, like yourself, will

come across another with a different point of view and come to an understanding on a quantity and price to trade. This is why

liquidity is such a crucial component of market opportunity. 

 

Current asset ratios shed light on the state of a business. in particular, its capacity to meet short-term obligations. The better a

company is able to meet its short-term obligations, the higher its liquidity ratio. In contrast, this is true for businesses with low

liquidity ratios.

 

Risks Associated With Liquidating Inventory And Receivables

Receivables and inventories, out of all the current assets, can be the most risky and take the longest to dispose. There will

virtually always be a portion of our receivables that we are unable to collect. We shouldn’t rely on the value of the receivables as

the complete cash conversion since allowance for dubious accounts should offset the amount of lost receivables.

 

We are totally at the whim of the customer when it comes to the liquidation time of receivables. Clients may pay promptly, after

the fact, or not at all. When it comes to liquidation, inventory is a more extensive procedure than receivables. We rely on

consumers to buy our product at the advertised price. Before a customer makes a purchase, there is a trip to get them into the

store.

 

On that journey, many things could go wrong. We need to account for a certain percentage of returned or damaged goods,

assuming a consumer really makes the transaction. It’s fairly typical to permit credit purchases. In this instance, after the sale is

made, we must wait a set amount of time before collecting money.

 

Of course, this poses the same risk as receivables (i.e., no payment). Certain inventory can be challenging to transport in specific

situations (i.e., sale). Making the inventory available to customers at a discount might be a first effort.

 

If that doesn’t work, we should think about selling to a wholesaler. This usually entails further marking down the inventory. The

inventory is currently being sold for a significant discount from its original price.

Liquidity Will Replace Fixed Assets

In today’s fast-changing economic landscape, liquidity is replacing fixed assets as a key driver of financial success. Traditionally, industries like construction and manufacturing relied heavily on fixed assets such as machinery, real estate, and infrastructure. These tangible assets were often considered valuable collateral for securing loans and financing business operations. However, the financial sector’s perspective has shifted, placing greater emphasis on liquidity over asset ownership.

Banks and financial institutions are now prioritizing liquidity over hard assets when evaluating a company’s creditworthiness. As a result, businesses that traditionally relied on their asset-heavy balance sheets may need to rethink their strategies. Instead of purchasing equipment outright, many companies are turning to leasing and rental models to maintain cash reserves and improve financial flexibility.

Leasing vs. Ownership: A Strategic Move for Liquidity

One of the most effective ways to enhance liquidity is to lease rather than buy. Businesses that lease equipment or real estate can preserve capital, reduce financial risk, and adapt quickly to changing market conditions. Leasing also minimizes the burden of depreciation and maintenance costs, allowing companies to allocate funds toward growth, innovation, or expansion efforts.

Additionally, businesses that already own fixed assets can unlock liquidity by renting out their underutilized equipment or properties. This approach generates cash flow without requiring the sale of valuable assets, ensuring companies remain financially agile.

Working Capital: The Key to Financial Flexibility

Liquidity isn’t just about having cash on hand—it’s also about managing working capital efficiently. Working capital, defined as current assets minus current liabilities, represents a company’s ability to cover short-term expenses while funding growth. Maintaining healthy working capital levels is essential for ensuring smooth operations, meeting financial obligations, and taking advantage of strategic opportunities.

Many businesses track working capital as a percentage of revenue, using industry benchmarks to determine optimal levels. A well-managed working capital strategy allows companies to navigate economic downturns, invest in high-return opportunities, and sustain long-term profitability.

The Competitive Advantage of Liquidity

In an unpredictable business environment, financial flexibility is a competitive edge. Companies with strong liquidity can seize opportunities faster, whether through strategic acquisitions, rapid expansion, or market investments. The ability to deploy cash quickly can differentiate a business from its competitors, especially during times of economic uncertainty.

By prioritizing liquidity over fixed assets, businesses can position themselves for long-term success, financial resilience, and sustainable growth in 2023 and beyond.

 

 

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REGISTRATION PROCESS: 

Step 1: Register Online

1. Visit the Philstocks PH website.
2. On the homepage, click on “Register”.
3. Choose the type of account you want to open (e.g., Individual, Joint, Corporate).
4. Fill out the online registration form with your personal details, including your full name, email address, mobile number, date of birth, nationality, and address.
5. Create a username and password for your account.
6. Review and agree to the terms and conditions.

Step 2: Upload Your Valid IDs and Take a Selfie for Verification

1. Prepare digital copies or clear photos of the required identification documents.
2. Ensure you have a valid government-issued ID, such as a Passport, Driver’s License, SSS ID, or any other accepted ID.
3. Upload the photos or scanned copies of your valid IDs as instructed on the registration form.
4. Take a selfie with your valid ID for identity verification purposes.
5. Ensure that the uploaded photos are clear and readable to avoid delays in verification.

Step 3: Fund Your Account

1. Once your account is approved, log in to your newly created Philstocks PH account.
2. Navigate to the “Fund Account” section.
3. Choose your preferred method of funding your account (e.g., bank transfer, online payment).
4. Follow the instructions provided to deposit funds into your trading account.
5. Wait for the confirmation that your funds have been credited to your account.

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