Liquidity

Lesson

Liquidity of pooled investments is the ease with which an investor can buy or sell their shares in the investment.

Practice Question #1

Which type of pooled investment is traded on an exchange like a stock and typically tracks an index or a specific sector?

A) Mutual fund

B) Exchange-traded fund (ETF)

C) Closed-end fund

D) Open-end fund

Select an option above to see an explanation here.

A) Mutual funds are not traded on an exchange like a stock. B) ETFs are traded on an exchange like a stock and typically track an index or a specific sector. C) Closed-end funds are traded on an exchange like a stock but do not typically track an index or a specific sector. D) Open-end funds are not traded on an exchange like a stock.

Terms

Liquidity:: The ease with which an asset can be bought or sold in the market without affecting its price.

Practice Question #2

What is the term for the value of a pooled investment's assets minus its liabilities, divided by the number of outstanding shares?

A) Market capitalization

B) Bid-ask spread

C) Net asset value (NAV)

D) Redemption value

Select an option above to see an explanation here.

A) Market capitalization refers to the total value of a company's outstanding shares. B) Bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. C) Net asset value (NAV) is the value of a pooled investment's assets minus its liabilities, divided by the number of outstanding shares. D) Redemption value refers to the amount an investor receives when selling their shares back to the pooled investment.

Historical Example

In 2008, during the financial crisis, many investors faced difficulties in selling their shares in certain pooled investments due to a lack of liquidity in the market. This led to significant losses for some investors and highlighted the importance of considering liquidity when investing in pooled investments.

Practice Question #3

Which type of order is used to buy or sell an asset immediately at the best available price?

A) Limit order

B) Stop order

C) Market order

D) Stop-limit order

Select an option above to see an explanation here.

A) Limit order is an order to buy or sell an asset at a specific price or better. B) Stop order is an order to buy or sell an asset once it reaches a specific price. C) Market order is an order to buy or sell an asset immediately at the best available price. D) Stop-limit order combines a stop order and a limit order, which becomes a limit order once the stop price is reached.

Real-World Example

An investor who needs to access their funds quickly may choose to invest in an ETF rather than a mutual fund, as ETFs are traded on an exchange and can be bought or sold throughout the trading day, providing greater liquidity.