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What it is
Liquidation is the process of closing a business and selling its assets to distribute the proceeds to claimants like creditors and shareholders.
This typically happens when a company becomes unable to pay its debts and goes bankrupt. Liquidated assets are used to repay debts first before distributing the remaining proceeds to cover other claims.
What it means for you
If a company you’ve invested in goes bankrupt, you may be entitled to liquidated assets depending on the priority level of your claim.
For example, secured creditors are usually paid first since their issued loans are backed by a collateral. Next in line are unsecured creditors or bondholders.
If there are remaining assets, preferred shareholders have priority over common shareholders in terms of payment.
The possibility of a bankruptcy or even just a default highlights the importance of checking a company’s financial standing before investing in its stocks or bond issuances.
Liquidation can also happen if you’ll do leverage trading or trading using borrowed money. A trade can be liquidated by a platform if an account falls below the required minimum amount.
This means the trade will be forcibly closed and the money you’ve deposited in the account as collateral will be lost.
