CandleFocus Glossary Editor
Liquidation is a process wherein investors convert a given asset into cash. This is done for a variety of reasons, including needing money, exiting a weak investment, or combining investments as part of a portfolio reshuffling. The process of liquidation involves the sale of a particular asset so that the owner obtains cash in exchange for it. This is also known as asset liquidation. Liquidation can also occur involuntarily as a result of bankruptcy or a demand by a broker due to a margin call.
Voluntary liquidation is a fairly common occurrence among investors looking to raise capital in the short-term or wanting to exit an investment that is performing poorly. For the former, liquidation can emerge as a way of avoiding a taxable event by realizing a return on the asset rather than selling it and incurring a capital gains tax. For the latter, liquidation can be used as a way to raise cash quickly and to exit a weak investment before it experiences further losses.
Banks and other financial institutions can also force liquidation through a process called involuntary liquidation. This type of liquidation is typically associated with bankruptcy and is enforced through a court of law. While involuntary liquidation is often initiated by creditors, asset owners are also at risk of liquidating assets to satisfy debts. For individuals who are unable to repay loans, their assets may be used to pay creditors and the seller will receive cash in the process.
Brokers also have the power to initiate liquidation upon notification of a margin call. In this scenario, the amount of money loaned to a trader must be paid back if the equity on certain investments drops below a certain level. If the trader fails to do so, then the broker has the right to liquidate the leveraged or margin accounts to recoup the money owing and return the trader's account to the regulated minimum.
In conclusion, liquidation is an important feature of the financial and banking industry. This method of obtaining cash for a given asset is often utilized in the short-term by investors looking to raise capital or exit an investment, as well as those seeking to avoid a taxable event. Additionally, bankruptcy and margin calls are instances whereby an asset can be liquidated involuntarily, on account of creditors or brokers seeking to renegotiate debt. Understanding liquidation and its benefits and risks is key to protecting one’s investments and portfolio.
Voluntary liquidation is a fairly common occurrence among investors looking to raise capital in the short-term or wanting to exit an investment that is performing poorly. For the former, liquidation can emerge as a way of avoiding a taxable event by realizing a return on the asset rather than selling it and incurring a capital gains tax. For the latter, liquidation can be used as a way to raise cash quickly and to exit a weak investment before it experiences further losses.
Banks and other financial institutions can also force liquidation through a process called involuntary liquidation. This type of liquidation is typically associated with bankruptcy and is enforced through a court of law. While involuntary liquidation is often initiated by creditors, asset owners are also at risk of liquidating assets to satisfy debts. For individuals who are unable to repay loans, their assets may be used to pay creditors and the seller will receive cash in the process.
Brokers also have the power to initiate liquidation upon notification of a margin call. In this scenario, the amount of money loaned to a trader must be paid back if the equity on certain investments drops below a certain level. If the trader fails to do so, then the broker has the right to liquidate the leveraged or margin accounts to recoup the money owing and return the trader's account to the regulated minimum.
In conclusion, liquidation is an important feature of the financial and banking industry. This method of obtaining cash for a given asset is often utilized in the short-term by investors looking to raise capital or exit an investment, as well as those seeking to avoid a taxable event. Additionally, bankruptcy and margin calls are instances whereby an asset can be liquidated involuntarily, on account of creditors or brokers seeking to renegotiate debt. Understanding liquidation and its benefits and risks is key to protecting one’s investments and portfolio.