|The Jolly Contrarian’s Dictionary |
The snippy guide to financial services lingo.™
Liquidity period /lɪˈkwɪdɪti ˈpɪərɪəd/ (n.)
Of a financial instrument, the shortest period which an investor, or counterparty, is stuck with it. In the liquidity period one is at risk to your asset cratering into a sulfurous hole in the ground, so it is an issue that should exercise an investor’s mind far more than, in most cases, it does.
For a stock, you can sell it at any time, so the liquidity period is close to nil. UCITS funds are likewise poretty liquid. Some alternatives — hedge funds, private equity — that kind of thing — may only accept subscriptions and redemptions every quarter (or an even longer period).
There are practical limitations, too. You can, in theory, sell your house at any time, but in practice it will take you three to six months to actually shift it from the moment you decided to. Even an equity may suddenly lose liquidity, when the market turns to custard and suddenly no-one’s buying: see Enron and the global financial crisis for tasty examples of that kind of Vanillasoße.
One protects one’s vulnerability to market gyrations during a liquidity period — at which point you’re in suspended animation — by requiring initial margin. The longer the liquidity period, the more margin you can expect to have to stump up. This is because there is a time value in volatility. This stands to reason: a stock can only fall so far in a single session. In three or six months it can go a lot further.