Markets attach a value to liquidity, for the possibility of immediate monetisation. We discussed this last week. To briefly recap, there is a positive feedback loop between stock liquidity and valuations — a highly liquid stock is more appealing as investors can buy and/or sell quickly without causing significant price changes. Strong investor interest translates into higher share prices and valuations, which will attract even more investors — and portfolio fund inflows — as the company grows in size (market cap) and commands ever larger weightage in bellwether indices.

Conversely, this means less-liquid stocks will suffer the opposite effect. Portfolio funds largely avoid illiquid, small-cap stocks that are perceived as higher risks — because it is harder to exit without being forced to accept lower-than-prevailing market prices. As a result, many such stocks often trade below their fair discounted cash flow (DCF) valuations, all else being equal, which further discourages investments, even by retail investors. We have shown the anecdotal evidence for this phenomenon in our previous article. The question is, how do we capitalise on it?

To continue reading,

Sign in to access this Premium article.

Subscription entitlements:

Less than $9 per month
3 Simultaneous logins across all devices
Unlimited access to latest and premium articles
Bonus unlimited access to online articles and virtual newspaper on The Edge Malaysia (single login)

Stay updated with Singapore corporate news stories for FREE

Follow our Telegram | Facebook