Hi every one … on page 322 they wrote:
some active investing approaches “demand liquidity” from the market . for example in a momentum strategy. the investor seeks to buy shares that are already rising in price (or sell those that are already falling). in contrast, some active investing approaches are more likely to “provide liquidity” to the market, such as deep value strategies involving stocks that are deemed to be significantly undervalued.
can anyone help me better understand these two terms: demand vs provide liquidity? which party of the trade is demanding or providing liquidity? and by liquidity do we mean cash or liquidity of the stocks?
In a bullish market, there are more people buying stocks than people selling stocks (a lot of buyers, but enough sellers, so there will be lack of liquidity in the market; as there is not enough to meet the demands of the buyers). So investors who want to buy demand liquidity from the market.
Investors generally avoid stocks that are significantly undervalued as these companies could be under financial distress (price significantly below the book value), so those who hold these stocks would want to sell it (i.e. more sellers than buyers).
Then comes the investors who are following deep value strategies who would want to buy these significantly undervalued stocks. So, these “deep-value” investors will buy the stocks from the existing holders, thus providing liquidity to the group of investors who want to sell.
