Question

I could use some help with these questions:

Are investors any different to ordinary buyers of stocks and bonds in seeking some assurance of liquidity?

Give at least two reasons why they are and two reasons why they are not.

Answer 1

Stocks and bonds are generally liquid in nature. The investor is able to sell the shares or the bonds that he/she has and recover the money that haa been invested in the stock or bond. The assurance of liquidity is not needed as

1. the two financial instruments i.e. stock and bond are liquid in nature.

2. These can be sold off quickly in the market and the investor can get back the money. The other reason that assurance is not needed because these financial instruments have a huge market and there are many buyers and sellers of these instruments.

Two reasons why assurance is needed are:

1. If the share is a preferred share then selling them may not be easy and so assurance is needed.

2.The bonds and shares may be sold but the value or the amount of money that will be needed may not be the same as the price at which it was bought. Thus, the assurance is needed regarding the amount that will be obtained on selling.