Money & Investing - Banks.com

One of the more interesting investing opportunities for traders is in illiquid securities. These are interesting securities that do not trade regularly on the stock market. They aren’t like stocks that you normally see on the stock exchange, with millions of shares trading hands every day — with up to the second values.

Instead, illiquid securities are those that cannot be converted to cash easily. Illiquid securities may be those that are not listed on an exchange, yet, or those that do not have an active market. The trading takes place rarely. In fact, you may be unable to sell your illiquid securities if you want to. You have to wait until there is a market for them.

Part of the current problems regarding the subprime mortgage market and many companies that invested in the debt has to do with the fact that securities containing subprime debt do not have any universally accepted value. This is because, since illiquid securities are traded infrequently, there is no knowing their “real” value. This can’t be seen until they are readily available for trading.

Peter Siris at the New York Daily News makes this point about fund managers and illiquid securities:

But in more complex cases, like the packages of subprime loans or leveraged buyouts, it could be years before anyone knows.

Yet investment funds and financial institutions are expected to assign a value to these securities every day. In most cases, it is in the manager’s interest to go high. After all, that means better performance, making it easier to attract more assets and a much bigger payday.

It is true that in some cases, illiquid securities can be valuable additions to your portfolio. However, they are quite risky. You could be in great shape when they suddenly become liquid, earning a great deal when you can finally sell. But, if the public stock market doesn’t value the security at the price you bought it for, it could mean a loss.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.

Tags: investing blog, illiquid securities, investment opportunities, investing securities,
subprime market, fund managers, stock investing news