What is Stock Liquidation?

Malcolm Tatum

"Stock liquidation" is a term that refers to selling off shares of a specific stock in significant amounts. At times, an investor may choose to engage in liquidation because there is a good chance that the value of the shares will plummet in the near future. A liquidation may also come about because the investor needs cash immediately in order to manage some type of debt crisis, effectively forcing the investor to sell shares that he or she would otherwise choose to maintain in the portfolio. In most scenarios, liquidation occurs when unanticipated events occur that make it necessary to sell the stock as quickly as possible in order to prevent a significant degree of loss.

Businessman with a briefcase
Businessman with a briefcase

There are a number of different approaches to stock liquidation. Voluntary liquidation takes place when the price of the shares falls to a certain amount. At that point, the investor instructs the broker to sell the stock. This benchmark is normally at a level that still covers the original purchase price for the shares, but prevents the investor from realizing much in the way of a loss, especially if those shares continue to decline in value after the sale is complete.

A similar approach to stock liquidation is known as an involuntary liquidation. In this scenario, the sale may be triggered by a determination by the brokerage that a given stock is about to incur major losses. In order to protect the interests of the brokerage, the involuntary sale is executed. Taking this action helps to protect the brokerage from incurring losses on investor accounts that would become delinquent as a result of the change in the value of those shares. The only way for an investor to avoid this type of liquidation and hang on to the shares is by adding funds to the investment account that would prevent the balance from falling into a delinquent state.

Investors can also use stock liquidation as a strategy. Sometimes known as a time stop and liquidation approach, this method calls for setting a price that the stock must reach within a given time frame. If the stock price fails to reach that level, a sale is automatically initiated on the final trading day of that time frame.

Companies can also engage in stock liquidation, either as a full or a partial liquidation. This is often the case when a business goes bankrupt or encounters some sort of financial difficulty that calls for the generation of funds to manage outstanding debt. Depending on current governmental regulations related to bankruptcy and stock holdings, the company may be able to initiate the stock liquidation without having to obtain consent from its shareholders. Assuming that the liquidation is sufficient to cover the company’s debts, any revenue that remains can be distributed among the investors.

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