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I'd argue that stock in an S&P 500 publicly traded company is pretty much as liquid as cash.

JumpCrisscross 10y ago
> I'd argue that stock in an S&P 500 publicly traded company is pretty much as liquid as cash. That argument is good until it is not. Unfortunately, when it is not is precisely when one needs it.
- phamilton 10y ago
  When is it not liquid? Sure, it's highly variable and the value could tank, but when has an S&P 500 company had zero liquidity? Edit: Additionally, salary falls in the same boat. If your stock in your S&P 500 employer tanks, you salary will tank too. Also, I'm talking about a "sell as soon as it vests" strategy, which makes it pretty much just a variable form of salary.
  - JumpCrisscross 10y ago
    > When [are blue chip stocks] not liquid? Liquidity is a surface over the time in which a transaction must occur, transaction size and price. If you have a large amount to sell or buy (relative to the market), want it sold or purchased quickly (relative to the market) and/or don't want to eat more than an X% discount (if selling) or premium (if buying) (relative to the market), you will find the securities illiquid, i.e. not able to be turned into cash (or purchased) within your size/price/time parameters. For a liquidator, time is usually same day or a few days. Size is fixed to the balance of the loan. That leaves price. In a turbulent market, the liquidator may end up selling your securities for pennies on the dollar - your collateral may insufficiently cover your balance. That leads to the lender eating a loss or the borrower coughing up cash. $100 of stock may cover less than $100 of balance; $100 of cash will always cover $100. Retail margin lending is capped at 2:1, so a 50% discount would wipe out your collateral, but institutions and mortgages can go 5:1 and beyond, meaning smaller drops become dangerous faster. When everyone is rushing for the doors simultaneously, these price drops can be precipitous, if short-lived.
    - phamilton 10y ago
      That was really informative. Thanks. My point, however, isn't about collateral. It's about future cashflow. A Senior engineer at Google might have a salary of $150k, but total compensation package including 270 shares of GOOG distributed per year (~23 shares per month) for a total comp of $350k. For such an individual, do you lend based on salary alone or do you factor in the stock? I imagine that with a correct discount the stock can and should be used in the cashflow calculation.

> I'd argue that stock in an S&P 500 publicly traded company is pretty much as liquid as cash. That argument is good until it is not. Unfortunately, when it is not is precisely when one needs it.

phamilton 10y ago
When is it not liquid? Sure, it's highly variable and the value could tank, but when has an S&P 500 company had zero liquidity? Edit: Additionally, salary falls in the same boat. If your stock in your S&P 500 employer tanks, you salary will tank too. Also, I'm talking about a "sell as soon as it vests" strategy, which makes it pretty much just a variable form of salary.
- JumpCrisscross 10y ago
  > When [are blue chip stocks] not liquid? Liquidity is a surface over the time in which a transaction must occur, transaction size and price. If you have a large amount to sell or buy (relative to the market), want it sold or purchased quickly (relative to the market) and/or don't want to eat more than an X% discount (if selling) or premium (if buying) (relative to the market), you will find the securities illiquid, i.e. not able to be turned into cash (or purchased) within your size/price/time parameters. For a liquidator, time is usually same day or a few days. Size is fixed to the balance of the loan. That leaves price. In a turbulent market, the liquidator may end up selling your securities for pennies on the dollar - your collateral may insufficiently cover your balance. That leads to the lender eating a loss or the borrower coughing up cash. $100 of stock may cover less than $100 of balance; $100 of cash will always cover $100. Retail margin lending is capped at 2:1, so a 50% discount would wipe out your collateral, but institutions and mortgages can go 5:1 and beyond, meaning smaller drops become dangerous faster. When everyone is rushing for the doors simultaneously, these price drops can be precipitous, if short-lived.
  - phamilton 10y ago
    That was really informative. Thanks. My point, however, isn't about collateral. It's about future cashflow. A Senior engineer at Google might have a salary of $150k, but total compensation package including 270 shares of GOOG distributed per year (~23 shares per month) for a total comp of $350k. For such an individual, do you lend based on salary alone or do you factor in the stock? I imagine that with a correct discount the stock can and should be used in the cashflow calculation.