Introduction:
Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return. One aspect of Risk that investors need to consider is the liquidity of their investments. Liquidity refers to the ease with which an investment can be bought or sold without significantly impacting its price. While many investments can be sold during normal market hours, there are a few types that come with limitations. In this article, we will discuss investment types that cannot be sold during normal market hours.
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Unit Investment Trusts (UIT):
Unit investment trusts (UIT) buy a fixed portfolio of securities and allow investors to redeem their "units," similar to a mutual fund. However, UITs are not actively traded like mutual funds, and their units cannot be sold during normal market hours. UITs are typically redeemed at the end of the trust's predetermined investment period.
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Closed-End Funds (CEF):
Closed-end funds, unlike open-end mutual funds, have a fixed number of shares available. These funds trade on an exchange like stocks and their prices can deviate from their underlying net asset value (NAV). While CEFs can be bought and sold during normal market hours, their prices may not always reflect the NAV accurately.
Real Estate Investment Trusts (REITs):
REITs are investment vehicles that own and operate income-generating real estate properties. While REIT shares can be bought and sold during normal market hours, the underlying real estate assets may not be readily liquid. It may take time to sell the properties, making REITs less liquid compared to stocks or bonds.
Private Equity Investments:
Private equity investments involve investing in non-publicly traded companies. These investments are illiquid by nature and cannot be sold during normal market hours. Private equity investments often have lock-up periods, meaning investors must commit to holding their investment for a certain period of time.
Certificates of Deposit (CDs):
CDs are time deposits offered by banks and typically have fixed terms ranging from a few months to several years. Once you purchase a CD, you cannot sell it before its maturity date without incurring penalties. CD investors must wait until the maturity date to access their funds.
Money Market Funds:
Money market funds are a type of mutual fund that invests in highly-rated, short-term debt securities. While money market funds can be bought and sold during normal market hours, they are subject to certain restrictions. The Securities and Exchange Commission (SEC) imposes limitations on money market fund withdrawals to maintain stability and prevent a run on the fund during times of market stress.
Conclusion:
Understanding the limitations on selling different investment types during normal market hours is crucial for investors. While most investments can be bought and sold during market hours, certain types, such as UITs, CEFs, REITs, private equity investments, CDs, and money market funds, have restrictions. It is important to consider the liquidity of an investment before making any investment decisions. By being aware of the limitations, investors can make informed choices and align their investment strategies with their liquidity needs.
