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Finance GlossaryLiquidity Trap
Liquidity Trap
Definition of Liquidity Trap
A Liquidity Trap is an economic event where the general public stashes cash in their bank savings account instead of investing in bonds because of the assumption that a rise in interest rates is imminent, even though interest rates are low.
Related Terms
Cash and Cash Equivalents
Cash and cash equivalents are short-term assets or holdings which fall under the current assets of a business. Cash and cash equivalents have very high liquidity. When you take the term literally, you have two components:
- Cash: money like cash holdings in a bank account, petty cash, and others
- Cash equivalents: assets or investments like T-bills, commercial paper, and others that have a short maturity which can easily be converted into cash
Securities Lending
Securities Lending is a process through which investors can lend their shares to borrowers, usually for short selling. In return, they receive interest or fees. The lender continues to be the owner of the assets. The borrower needs to return the securities later. Securities lending helps in improving liquidity in the market. Long-term investors can also earn extra income on holdings that remain idle for a while.
Prospectus
A prospectus is a legal document that gives detailed disclosure about a company's financial condition, its operations, management, and the terms of a new securities offering (such as an IPO). It is mandated by regulatory bodies and must be provided to potential investors to provide them with all the information they need to make an informed investment decision. The two key parts are the preliminary prospectus (red herring prospectus) and the final prospectus.
Alpha
An Alpha indicates the measure by which a stock or portfolio has managed to outperform a benchmark like an index of shares.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
Lock In
Lock-in is the period during which you can not sell shares or other financial instruments. The purpose of a lock-in is to ensure that the price and liquidity of the instrument do not take a sudden nosedive. Lock-in is commonly applied to shares held by promoters or major shareholders. You may have heard the term while investing in mutual funds as well, where it is used in reference to close-ended funds and ELSS funds.
Cash Flow Statement
A cash flow statement is used to present the amount of money that has been earned and spent by a business over a specific period of time. There are three sections or parts to a cash flow statement:
- Operating Activities: cash flows from the core activities of a business that generate income as well as cash equivalents (current assets & liabilities)
- Investing Activities: cash flows from investments or sales of long term assets
- Financing Activities: an action or activity that brings a change in a business’ equity capital and/or borrowings
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