What your stock investment is worth may seem easy to calculate. Just look up the most recent price of your stocks and multiply these prices by the number of shares you own, right? Well, not always. Under certain circumstances, the net liquid value and the theoretical value of your stock portfolio may not be quite equal. Knowing when and where such differences can arise will help you plan your financial future more prudently.
The theoretical value of your stock portfolio is easy to calculate if your stocks are traded on a public exchange, such as the New York Stock Exchange. Each stock holding is, in theory, worth the number of shares times the most recent stock price. Adding up the net value for all stocks in your portfolio equals the theoretical value of your entire stock portfolio. This number is also referred to as "paper value," as it equals what your stocks are worth on paper. In some instances, however, this figure may not really represent what you could get if you were to sell your stock holdings.
The easier it is to buy or sell large numbers of a stock's shares without disrupting the market price, the more liquid the stock is said to be. Liquidity is usually a result of heavy trading volume. If 10 million shares are traded per day, and you sell 100,000 units of a particular stock, your sale will likely not move prices up or down. But if only 200,000 shares change hands every day, your sale will likely drag prices down, because it represents a relatively large jump in supply.
Daily Price Moves
In addition to checking the daily trading volume on a stock, you can also eyeball the typical daily price fluctuations to get an idea about liquidity and how close your net liquid and theoretical values will likely be. Generally, liquid stocks move up or down by a few percentage points on most days. If a stock advances or declines far more than on most days, it is probably an illiquid stock. When you are not sure whether the typical daily price move should be considered large or reasonably small, compare the daily change in the stock's price to the changes for stocks of similar companies in the same industry. If your stock is moving up or down more violently on most days, you are dealing with an illiquid stock.
Estimating Net Liquid Value
If the daily trading volume of your stock is far larger than your holding, ideally several hundred times greater, you can assume that your theoretical and net liquid values are equal. If, however, the trading volume is small and the stock's daily fluctuations are large, there is no easy method of estimating the net liquid value. You can assume that your sale will likely drag the trading price down, which means your net liquid value will be less than your theoretical value. The precise difference, however, depends on too many factors. To minimize dragging the price down too much, you can sell your holdings in smaller installments over several days.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.