The Danger Of Low-liquidity Stocks

Private equity is not for sissies – and has much in common with low-liquidity stocks, argues Simon Brown.

- Simon Brown

I often mention that buying a low-liquidity stock is like investing in private equity. I want to expand on private equity and how and why it works. We’ve also seen two new listings planning to come to the JSE via private equity – Libstar and Consol, with the last cancelling its listing towards the end of the April.

Public equity

The first distinction to be made is between private and public equity. Public equity is exchange-listed stocks, therefore those we’re buying on the JSE. Aside from the extra layer of protection afforded us by the JSE’s listing requirements, we also get liquidity and price discovery.

Liquidity is important, and typically a liquid listed company will trade at a higher valuation than the same company that’s not listed. This is because being able to turn an investment into cash is an advantage; sure, we’re long-term investors, but the ability to buy or sell with ease still matters.

Private equity