Why does liquidity matter?

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Many companies wonder why liquidity and volume of daily share trading matter when they are looking to raise money. The answer is: institutional investors need liquidity. They only invest in companies that they can later sell to the post market.

If there is no liquidity pre-financing, an institutional investor will require significant additional discounts or warrants up front to pay for the lack of liquidity and the implied promise of future liquidity. In some cases, if there is not enough liquidity, they just won’t buy into the company, and that leaves the company un-bankable.

Every institutional book holder or principal has a range of position sizes that they can invest in, and they have a required number of days to exit the stock if they need to. Institutional investors are not all like Buffett, who falls in love forever. Institutions also understand that when a principal leaves, the book must be liquidated or transferred. So, if you’re looking for institutions to hold $1 million of your stock, expect them to want a historical average of $200,000 to $500,000 per day in total market liquidity. If you get a notice that a major shareholder is changing firms, find a home for the stock quickly.

How can a company improve liquidity?

Management should spend time managing promotion at the retail level to generate the volume that will let them sell securities to institutions. Without managing and encouraging both retail buying and selling (hopefully more buying than selling), a company can never make the jump from small cap to mid-cap.

So, if you have a great property and no equity promotion resulting in trading, what can you to do?

We recommend focusing on three groups:

·       Newsletter writers: If you can get one to follow your story, it is worth as much as a bank backing you. However, keep in mind that not all newsletter writers were created equal.

·       Good IR firm or person: This person will build retail and small-size institutional market demand. We recommend that a significant amount of time and money be spent on promoting your story and explaining why it matters. Focus on actionable results, get rid of the bad firms quickly, and expect to pay for firms that deliver. Understand, however, that no amount of promotion of horse meat will make it Kobe steak.

·       Banks/brokers: Get one who knows your sector and market cap range well. We can help you recommend which one to go to.

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