Investor Education

What is liquidity?

What is liquidity?

Liquidity refers to how easy it is to buy or sell a stock or unit on the exchange.

With closed ended fund, such as a Listed Investment Trust, liquidity will depend on both the number of buyers and sellers AS WELL AS the relative demand for the stock or unit. In one scenario, a unit or stock may have a high demand but low liquidity if buyers and sellers disagree on the value. Without agreeing on a price, there’s no transaction. Alternatively, everyone may agree on the price of stock or unit, but there may be few buyers or sellers in the market. Both these situations can lead to low liquidity for closed ended products.

With Magellan’s Listed Investment Trust, we created a trust of scale, with over 34,000 unit holders in the trust as at March 2019. This aims to provide an orderly market of buyers and sellers.

With an open ended fund, such as a Magellan Active ETF, liquidity can be provided by the fund itself as investors can buy and sell units to and from the fund. With some other open ended funds, liquidity is provided by authorised market participants, known as ‘market makers’, rather than the fund itself. This means that regardless of demand, there will be liquidity and the ability to buy and sell units with ease in Active ETFs.

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