Archimedes Finance

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Managing liquidity

Lesson in Course: Investing basics (advanced, 4min )

I am ready to start investing. Do I dive right in with all my money or dip my toes in the water first?

Before we start investing or deploying capital, we need to understand how to manage our own liquidity. Managing liquidity is a task that emerging investors often underestimate. If done well, this could be the difference between an above-market return compared to a below-market return.

What is liquidity?

Liquidity, in the investing world, is the ability to convert investment assets into cash. Liquidity needs to be managed by investors because cash is used for transactions. If we've identified a great investment opportunity but don't have enough cash, our returns will suffer.

 

Using opportunity cost

Opportunity cost is explained in this short video.

Like the analogy of the man with the firework, our opportunity cost is having our money invested in an asset that returns less than a new investment opportunity we've identified. If we don't have the cash and can't convert our current investments into cash quickly, we would have lower long-term returns. 

On the contrary, if we have too much cash and we are waiting for the perfect investment opportunity to come along, our cash earns a return of 0 until that opportunity is found. A return of 0 will result in lower long-term returns.

To start learning how to manage our liquidity, we need to understand the strategies professional investors use to buy financial assets and sell financial assets.

In the next lesson, we'll cover some basic strategies on how to start buying financial assets. A general good rule of thumb is to space out our buys. For example, if we plan to invest $1000 into AAPL shares, we should not buy $1000 worth of shares in one purchase.

Glossary

What is liquidity?

Liquidity is the ability to convert investment assets into cash.

At Archimedes, our goal is to make investment literacy accessible and free for everyone.

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