The Wise Investor
still listening. She was concentrating deeply on his words.
"This story illustrates an important characteristic of
markets," he continued. "Some items are sold in massive
quantities. The perfect example of this is fresh food. Other
items, however, are bought and sold at less frequent
intervals. Rare furniture is an example here.
This quality of markets is called 'liquidity'. A market that
is liquid has a high turnover of goods. There will be many
similar items that are frequently bought and sold.
The price will be clear to all, as there will be many sellers
competing with each other and their prices will be similar. In
a market with low liquidity, however, two additional affects
come into play.
First, it may take some time to sell an item. If sales
happen only occasionally, it may take a while for a buyer to
come along. This was the case with the man with the desk.
Although it was a good desk, a desk is an item that one buys
rarely, and he had to wait until some-one came along who
happened to need a desk at the time
In some markets, such as expensive and unique
property, it can take six months or even a year to find a
buyer. Always remember this Kate. Just because an item
has a certain natural value, never assume that you can
actually sell it for this price at a moment's notice.
The second factor that comes into play in markets with
low liquidity is the price of items. In a liquid market, such as
a grocery market where there are twenty-three farmers
selling cabbages, the price of a cabbage will be clear to all.
The farmer's prices will vary slightly depending on the
quality of their cabbages, but the difference will be small. In
markets with low liquidity, however, the price of items is not
so clear. The particular item may be unique, so there are no
similar items to compare it with.
There may not be any similar items offered for sale at
that time. In this case, the price may be affected by how
desperate the seller is and how much the buyer wants to
buy. In an illiquid market, with few buyers and few sellers,