A liquid asset is an asset that can be readily converted to cash or cash cash on hand. An asset that can readily be converted to cash is similar to cash itself because the asset can easily be sold with little impact on its value. Liquid assets are the most basic type of asset. They're used by consumers and businesses alike.
Several factors must be present for an asset to be considered liquid. It must be an item in an established market with a large number of interested buyers. Ownership must be easily transferred.
Cash on hand is considered to be a liquid asset because it can be readily accessed. Cash is a legal tender that a company can use to settle its current liabilities. Themoney in yourchecking account,savings account, or money market account is considered liquid because it can be withdrawn easily to settle liabilities.
Key Takeaways
- A liquid asset is either available cash or an instrument that can easily be converted to cash.
- Liquid assets are perceived as being essentially identical to cash because they don't lose value when they're sold.
- A cash equivalent is an investment with a short-term maturity such as stocks, bonds, and mutual funds that can be quickly converted to cash.
- Liquid assets differ from non-liquid assets such as property, vehicles or jewelry that can take longer to sell and therefore convert to cash. They may be sold for less than their true value.
Cash Equivalents
Cash equivalents are typically investments that have short-term maturities of less than 90 days. They're considered to be liquid assets because they can be readily converted to cash. Examples of cash equivalents include:
- Stocks andmarketablesecurities that can be converted to cash in a relatively short period in the event of a financial emergency
- U.S. Treasuriesand bonds
- Mutual funds in which money from various investors is pooled and invested in a variety of financial securities including stocks andbonds
- Money market funds, a type of mutual fund that invests inlow-risk,low-yielding investments such as municipalbonds
Investors can buy shares ofa mutual fund rather than purchase shares of an individual stock.These transactions are executed by the fund manageror through abroker rather than on an open market.Mutual funds are considered liquid because investors can sell their shares at any time and receive their money within days.
Liquid assets are used by both businesses and consumers. They're perceived as being the most basic type of asset available.
Non-Liquid Assets
Non-liquid assets are those that can be difficult to liquidate quickly. Land andreal estate investments are considered to be non-liquid assetsbecause it can take months or more for an individual or a company to receive cash from the sale.
Suppose a company owns real property and wants to liquidate it because it has to pay off a debt obligation within a month. The process of selling the propertymay take longer thanamonth because it will take time to findaninvestor, negotiate and agree on a price,and set up the closing forthe sale. The property might sell fora lesser price than its current market value if the company wants to sell the property quickly,or it could sell fora loss.
Trying to liquidate a real estate investment can have a high impact on its value.
Liquid assets can easily be sold for cash and have a stable market price. Non-liquid assets cannot be sold quickly for cash and prices can be much more volatile.
How Do I Liquidate Stocks?
Selling stocks and other securities can be as easy as clicking your computer mouse. You don't have to sell them yourself.
You must have signed on with a brokerage or investment firm to buy them in the first place and you can simply notify the broker-dealer or firm that you now wish to sell. You can typically do this online or you can purchase an app for your phone that will take care of it for you. You can make a simple phone call and ask how to proceed. Your brokerage or investment firm will take it from there. You should have your money in hand shortly.
How Long Does It Typically Take to Sell a Home?
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development released a report in November 2023 indicating that residential properties spent 3.2 median months on the market in 2021, dropping to 1.9 median months in 2022. The term "median" is the tricky part here. It means that half of all residences took longer than this to sell and half sold in less time.
This data is based on new home sales but it nonetheless gives some perimeters to your expectations. Your best option is to hire a qualified real estate professional to get your property sold as quickly as possible. There are various steps you can take and concessions you can make to hasten the process along.
What Is Liquidity Risk?
Liquidity risk is a term that applies to financial institutions rather than individuals. It measures a firm's ability to meet its monetary and contractual obligations without suffering economic hardship. Most firms have management teams in place to monitor cash flow and to ensure that this risk doesn't occur.
The Bottom Line
An asset is anything that can be owned by an individual or entity that has or is expected to have economic value. Assets are also classified as either tangible or intangible assets.
Tangible assets are physical in nature and they have an easily determined material value on a public market. They're at risk of being damaged, lost, or stolen due to the actions of people or acts of nature. An intangible asset isn't physical in nature. Intangible assets include goodwill, brand recognition,or intellectual property like patents, trademarks, and copyrights.
Intangible assets are generally not liquid but they can be long-term and ongoing. Tangible assets are only liquid if you can readily exchange them for cash. They can be used in balance toward investment and budgetary goals.
