- Liquidating a stock produces cash. To liquidate the stock, a sell order is placed with a stock broker on an investor's behalf. As long as there is demand for that stock, there will likely be a buyer at the other end of the trade to provide the cash. In the event that a stock is less liquid and there is less demand for the security, it may take longer for a broker to liquidate the investment.
- An institutional investor such as a hedge fund -- which is a lightly regulated investment vehicle run by a professional -- may receive withdrawal requests from clients, known as redemption requests. In order to meet those demands, the hedge fund may need to liquidate some stocks for cash. To protect a fund so that the entire investment portfolio does not need to be liquidated, a hedge fund may implement "gating," which prevents investors from making redemption requests for a period of time.
- Sometimes stocks are liquidated because there is profit taking occurring. Investors who earn a sizable return on an investment and perhaps meet a predetermined goal may simply opt to sell or liquidate the investment before the stock reverses course. According to Reuters, some investors may opt to take profits following a recent surge in stocks. When profit taking leads to liquidating investments, the stock market could take a turn for the worse, even if there is no particular negative event weighing on stocks.
- According to the website Business First, investors should consider the ease in which a stock can be sold, or liquidated, before buying. The website suggests that liquidity can be measured by the number of shares available for trading, or the float, in addition to average trading volume, or how often that stock is bought and sold. As a result, the largest companies that trade on the stock market have the most liquidity.
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