What Are the Applications of Mild Steel?

Before we discuss the best method of liquidity management, let's define what exactly liquidity risk is. Liquidity risk management is a way investment portfolio managers use to hedge the risk of not being able to sell their large portfolio positions in a rapidly developing market. Put more simply, this is a method that investors use to protect themselves against large losses in stakes of companies or other assets that have few buyers (or sellers) at a given time. Now let's take a look at some of the best scope of liquidity management systems:

Portfolio Construction

Investors use several techniques of portfolio construction as risk management systems to keep from being hurt by any losses they suffer. Most significantly, investors diversify their holdings. The large, wealthy investors do not assign more than 5% of their total portfolio to any one stock in order to steer clear of the risk of losing too much on any single asset. Large investors also tend to invest in large, highly traded markets. For example: The FOREX market is the biggest in the world. In 2010 the Philippine stock market swiftly rose 58%, but the trading volume is minuscule in comparison to U.S exchanges and therefore carries a large liquidity risk.

Hedging

Another risk management system is hedging. This is when investors buy non-correlating or negative contracts as insurance on their large positions. For example, a trader who has a large stake in a company may purchase some relatively cheap put options as protection against a quick drop in price. The reason for this is that put options increase in value when the price of the company falls. One more thing hedgers can do is purchase an exchange-traded fund or other correlating asset to protect against liquidity risk. Correlations are used in order to trade more active stocks when a certain one has too little liquidity.

High Frequency Trading

Now the pit traders of the New York Stock Exchange and Chicago Board of Trade have been replaced by electronic market makers, like those on the NASDAQ. Since computer power is growing rapidly, traders have turned to high frequency trading. This method permits firms to swiftly buy and sell securities in microseconds, thus causing an explosion of liquidity. What also happened is that the spreads (difference between the bid and offer price) have shrunk to pennies for any large stock listed on the exchange.

To sum things up. Managing liquidity properly can serve to greatly lessen the risk of insolvency and late fees on your business's routine payments, along with other cash related problems. For these reasons, managers use special techniques to keep cash flows and cash reserves at the highest level possible and in balance with the company's operating needs and goals. A good plan for managing risk will ensure that an organization has the funds and collateral required to meet its obligations. Every business or individual investing in the stock market needs to have a plan for managing liquidity in place. It's essential to the survival of your business and your financial well being.

Jake Hyet is considered an expert on the properties and uses of steel, having worked for both Galvanized Metro Steel and Mild Steel Brisbane. He has written many articles on this topic.