Liquid alternatives may be used to reduce risk. Nevertheless, they may employ techniques that may be unfamiliar and can present certain risks. To use liquid alternatives prudently, investors need to be aware of the risks involved with these techniques. Such techniques include:
- Short Selling
A trading strategy intended to capitalize on falling prices.
Using borrowed money for an investment and expecting the profits to be greater than the interest owed.
Contracts where the value is based on the performance of other assets, interest rates or indices. Two common types of derivatives are options and futures.
Measure of how readily a security can be bought or sold on demand. A liquid security can be easily bought or sold with little or no impact on price. A liquid market is when the spread between the selling and buying price is close together. The spread will increase as markets become less liquid.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.