Flight To Liquidity

See: Flight to Quality.

When investors get oh so nervous about the markets, they often convert their investments in lightly or thinly traded small companies into those with more liquid or easily sell-able investments. Like...crap.com trades on a million shares a day even though it has 200 million outstanding. Institutional investors may quickly want to be able to be "all cash" and sell fully out a given position. So when they buy shares of KO or DIS, which trade a gadjillion shares a day, then they are fleeing to liquidity, in that they can sell DIS and KO...very fast.

But it doesn’t always end badly. Every day, investors cash out their investments without having a negative effect on the market as a whole. Yes, it's called trading. Problems arise when too many investors pull out of too many investments all at once, which creates volatility in the market, which freaks out other investors and leads them to pull out their investments, which creates even more volatility, and so on.

Picture being at the beach when a ginormous gaggle of seagulls suddenly take flight all at once, traveling across the water toward destinations unknown. It can be a little disconcerting for beachgoers. Where are they going? Why did they leave? What do they know that we don’t know?

A flight to liquidity can have the same effect on investors, who can find themselves wondering why a whole passel of peeps just suddenly pulled out of a particular market or investment.