What is the difference between a liquid asset, and an illiquid asset? What is the most liquid asset? Why is having liquid assets on hand valuable? In this NachoNacho blog, we will delve into these terms, and help you formulate an understanding.
What is liquidity?
The term liquidity refers to how quickly an asset that you own can be turned into cash for a fair value. A rare coin collection or a property are examples of illiquid assets, as to convert these assets into cash would take a long amount of time. You would need someone to appraise the property or collection and then look for a buyer. All this takes time and makes these assets less liquid. On the other end of the scale, you may find assets such as stocks to be much more liquid, as selling these shares is a relatively quick process if the company is publicly traded. It is better to think of liquidity as a scale, with some assets being more liquid than others. If you would like to find out more about liquidity, you can read more about it in our blog post here.
What is the most liquid asset?
If we define liquidity as the ease with which an asset can be converted to cash, cash itself would be the most liquid asset! As there is no conversion necessary, you can access those funds instantly.
Why is having liquid assets on hand valuable?
Having liquid assets on hand, whether that be for a company or a person is extremely important. Everyone will run into expenses, and the payment of those expenses is usually done with cash. Having no cash or liquid asset reserves means that you will not be able to pay those expenses, and therefore keeping cash reserves is extremely important. After all, owning a painting that’s worth millions, but will take weeks to sell won’t help if you need to buy supplies right now.