Introduction

One of the biggest challenges facing African markets is liquidity. Out of more than 600 companies in our database, over 130 have not had any trading activity in the past year. This raises the question of whether liquidity is important for our African companies.

Most African companies qualify as “small caps” in the international context.

Do illiquid companies not trade because investors aren’t aware of them? Or are they not aware of them because they do not trade? It’s unclear which came first, the lack of trading or the undervaluation.

Differing perspectives offer valuable insights. However, for African markets and the companies operating within them, liquidity plays a significant role. Here, we explore the reasons why.

Understanding Liquidity

Before we dive in, let’s clarify what liquidity is. Liquidity refers to the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

Sadly most African stock exchanges do not disclose liquidity statistics, and when they do, they are not readily accessible.

The Investor’s Perspective

As investor Ian Cassel points out in a LinkedIn article published by Adam J. Epstein, investors who perform exhaustive research and take a long-term perspective can benefit from illiquidity in small public companies. By identifying profitable, fast-growing companies that don’t necessarily need to access the equity capital markets to deliver returns, these investors can benefit from illiquidity. They buy smaller amounts of stock than institutional investors and will take longer to build their positions.

The Company’s Perspective

However, from a company’s viewpoint, especially those in the African market, liquidity is vital. Illiquidity can become a serious disadvantage for the majority of public companies. Many companies aren’t profitable yet and need repeated access to equity capital markets for growth financings. In certain circumstances, being illiquid can be extremely detrimental, especially since illiquid shares will often be undervalued. It’s almost like a death sentence for the investment.

The Importance of Liquidity

Liquidity, or the lack thereof, directly impacts a company’s ability to raise capital. “Access to capital” is a function of trading volume. If a company’s shares don’t trade often, raising capital becomes a challenge (because, generally, their shares are undervalued). More liquid companies can raise capital on better terms than their less liquid counterparts.

Additionally, illiquid stocks struggle to attract credible research coverage. Companies with low trading volumes often find it challenging to gain the attention of analysts, which can limit their visibility among potential investors. The Interactive Analyst Centre by AfricanFinancials goes some way to addressing this. Plus, companies cannot use their stock to acquire other high-quality companies if they don’t trade much.

How AfricanFinancials Investor Relations Can Help

At AfricanFinancials, we assist illiquid companies by offering cost-effective tools that allow them to connect with investors at every opportunity. For instance, we provide email alerts to ensure they don’t miss out on any opportunities. The daily share price alert sends an email with the share price and valuation parameters illustrated in the body of the email (not the attachment), informing investors of any trading opportunity.

Conclusion

While perspectives on the importance of liquidity can vary depending on one’s investment strategy and objectives, for companies operating in African markets, liquidity matters. Ensuring regular access to capital, attracting credible research coverage, and leveraging stock for acquisitions are all benefits tied to having more liquid stocks.

Adopting robust investor relations practices can pave the way to improved liquidity and the sustainable growth of African companies.