About illiquidity premium

About illiquidity premium

• For example, unlisted stocks may have difficulty disposing and cashing them compared to listed stocks. In other words, there is a need for more time and money. Experts often calculate their value based on the premiums that are compensated for this risk.

• The simplest way to think about illiquidity is to consider the cost of a buyer's remorse. This is the cost of canceling an asset transaction almost immediately after making a transaction.

• Illiquid assets should be valued using higher discount rates. The discount on illiquidity of assets with high transaction costs should be greater, and the discount on illiquidity discounts should be reduced due to the perspective of the investor holding the asset.

• Experience has shown that less liquid assets have historically made higher returns.

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This is the list which products in liquidity order

• Treasury bonds / Negatively rated corporate bonds
• Widely held stock / Stock in OTC or emerging market
• Real assets
• Private business

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Illiquidity discount determinants

• Companies with high marketable securities should have lower illiquidity discounts than companies with relatively few assets by buyers.
• Companies with high earnings and positive cash flows should have a lower illiquidity discount than those with negative cash flows.
• The more likely a company is to be disclosed in the future, the lower the illiquidity discount should be.