Investing: What Are Illiquied Securities?

One of the investing options out there is the ability to invest in illiquid securities. You should be warned, however, that this is not something for the faint of heart. Additionally, you should only invest in illiquid securities if you are a bit further along as an investor. These are not for the beginning investor. But it can be useful to understand what illiquid securities are.

Illiquid securities

These are investments that are not often traded on the stock market. They might be listed, and you might be able to buy into them, but they are generally investments that do not trade very often. They may be private securities, or they may be foreign securities, or they may just be securities that do not trade very well. Generally, though, they are investments that have not been "made public" on the stock market, and they trade rarely. In fact, if you decide to sell, you may not be able to, due to rules or due to a lack of buyers.

Valuation of illiquid securities

Because they are not commonly traded, it is hard to pinpoint the value of illiquid securities. In fact, that is part of the problem of the current subprime lending and credit market crisis. Some securities, such as mortgage-backed securities, were illiquid. And so the valuation was more or less guessed at. Indeed, until these securities are sold, there is no real way to know how much they are worth. This is why some of the investments made by banks and other institutions in illiquid mortgage-backed securities haven't been nailed down. And it may be years before we know the extent of the damage.

Risks of illiquid securities

Many people invest in illiquid securities in the hope that they can get them for a good deal now, and then cash when the company "goes public." The idea is to hold on to shares, buying into the company (and providing capital) and then selling them when the illiquid securities become liquid -- and available to a wider range of people. This can be a good strategy in some cases. If the stock has a good debut, then investors can sell for a hefty profit. However, if the stock tanks, it can translate into a loss.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.