The ease with which you may sell an investment or asset at a reasonable price is referred to as liquidity.
Liquid assets are those that can be exchanged for cash:
- Quickly and easily
- With little or no transaction fees
- At their current market prices (i.e., without having to entice a buyer with a big discount)
Something is more liquid in general if:
- Many individuals would be interested in purchasing it;
- It’s simple to determine its value;
- It’s simple to transfer ownership from one person to another;
- The object or investment is more standardized (i.e., less unique)
A share of Apple stock, for example, is liquid because it’s simple to buy and sell, and many people would want to possess it at the proper price. You can figure out how much it’s worth by looking at the stock market’s current pricing. Furthermore, the corporation has billions of outstanding shares, therefore it isn’t unique.
A piece of custom-designed luxury real estate, on the other hand, is illiquid since there may be only a few potential purchasers, it’s difficult to agree on exactly how much it’s worth, and the transfer procedure can take a long time.
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate
- Collectibles, like coins, stamps, or baseball cards
Because you may easily convert cash into other assets, it is the most liquid asset.
Money market accounts and funds, savings accounts, and various forms of very short-term debt investments are all examples of “cash equivalent” investments. (Certificates of Deposit or CDs are a little less liquid since they lock your money up for a certain length of time and charge a fee if you need to withdraw it early.)
While there’s nothing wrong with retaining illiquid assets, people and businesses both benefit from having some liquidity.
- For day-to-day needs or unexpected obligations, you’ll need some liquid assets. If your sole asset is a house, selling it immediately for a fair price to fund a car repair would be difficult.
- Liquidity is required by businesses to fund short-term costs and maintain financial stability. If the company’s revenues are hit hard by a sudden economic downturn, having adequate cash on hand might help it get through it.
Liquidity refers to how quickly and easily an item may be sold for a reasonable price. Stocks, bonds, and ETFs (exchange-traded funds) are all liquid assets that are simple to sell. Real estate and fine art, for example, are illiquid assets that are more difficult to convert into cash. It is critical for both individuals and businesses to have sufficient liquid assets in order to pay short-term payments and cover any unforeseen expenses or financial difficulties.
- Liquidity refers to how quickly and easily an item may be sold for a reasonable price.
- Although cash is the most liquid asset, equities, bonds, mutual funds, and exchange-traded funds (ETFs) are all considered extremely liquid. Houses, coin collections, and art are all illiquid because finding a buyer willing to pay a fair price takes time.
- While having some illiquid assets is acceptable, you should balance them out with liquid assets that you can sell quickly if you need cash.