Capital Market » Liquidity

LIQUIDITY RATIOS

capitalmarket — Fri, 09 Oct 2009 11:17:26 +0000

There are two methods for measuring stock market liquidity

(A) TURNOVER RATIO

(B) VALUE TRADED RATIO

LIQUIDITY

capitalmarket — Fri, 09 Oct 2009 11:08:57 +0000

Liquidity is one of the most important indicators, that greatly influences stock market development and efficiency. It is one of the factors affecting the price discovery mechanism. A market is considered to be liquid when large volume of trades can take place without any significant effects on price. When an investor is able to transact at a price close to the current market price in the stock market, the market is liquid.

Liquidity is an important parameter taken into consideration by foreign institutional investors for investing in a market. A highly liquid market implies higher FII inflows and reduced liquidity implies lower FII inflows, reduced market capitalisation, poor sentiments and inability of market participants to transact easily. Moreover corporates are also unable to raise money from the markets for investment.

TOOLS FOR MANAGING LIQUIDITY IN THE MONEY MARKET

capitalmarket — Fri, 09 Oct 2009 11:03:36 +0000

There are five main tools for managing liquidity in the money market and they are:

(A) RESERVE REQUIREMENTS

(B) INTEREST RATES

Prime lending rate
Bank rate

(D) LIQUIDITY ADJUSTMENT FACILITY

(E) REPOS

Inter-bank repos
RBI repos

LIQUIDITY MANAGEMENT

capitalmarket — Fri, 09 Oct 2009 09:44:49 +0000

Effective liquidity management will enable an organisation to derive maximum benefits at minimal cost. Effective cash optimisation is critical to all organizations, especially in a tough economy. Cash is the lifeblood of organisations. An organisation having a proper set of liquidity
management policies and procedures will improve profits, reduce the risk of corporate failure and significantly improve its chances of survival. It also provides a strategic advantage especially in difficult economic times.

Liquidity Management can help corporate to achieve its goal to consolidate cash more effectively to take advantage of market opportunities. This could mean putting it back into working capital of the company, retiring debt, or maximizing returns through short-term investments until the right opportunity comes along. Regulatory developments worldwide are being worked upon to facilitate a more co-coordinated approach towards Liquidity Management. Even Liquidity product offerings from Banks and technology vendors are working towards providing best of breed tools for Liquidity Management.

Managing liquidity on a global basis is about moving your money from where you have it to where you need it; to be available at the time you need it. It is also about improving your control and visibility over funds, and being able to make more strategic decisions on how best to deploy your liquidity into investments or debt reduction.