What are liquid assets, and why do they matter? What are examples of highly liquid assets- and what about illiquid assets? What factors make an asset more or less liquid? The NachoNacho blog’s happy to delve into these terms and help you understand it all.
The concept of liquidity is fairly simple: a liquid asset is an asset (something you own that has/will have economic value) that can be quickly and easily exchanged for a sum of cash of equivalent value. You can view liquidity as being on a sliding scale, with cash on one end and things like fine art that are hard to immediately sell on the other.
Cash, or ‘legal tender,’ is the most liquid asset because, of course, you don’t need to do any exchanging when you have it; it’s already cash! You can exchange it for other things immediately without worrying about waiting for the optimal market conditions or finding a ‘buyer.’ The cash on your debit card, in your bank account, or on your NachoCard count as liquid assets as well.
Moving along the sliding scale away from liquid cash and toward the illiquid side, we see assets that are harder to exchange for cash on demand. Think investments and property that have longer, more difficult processes for selling them: artwork, real estate, antiques, restricted private equity funds, and more. These assets aren’t less valuable; they just are harder to quickly exchange for cash.
If you suddenly want to sell your home (for its full value rather than a crazy low price that you set just for the sake of getting rid of it), you likely will have to put it on the market, go through the appropriate regulations, find a buyer willing to pay the listed price, and then wait for payment to come through. That whole process doesn’t sound very liquid! Illiquid assets tend to have these types of limitations that necessitate time and effort in transforming them into cash that you can readily use.
Liquid assets tend to have large markets with many buyers that are ready to make exchanges. And having access to liquid assets is important because it means you can get money in a pinch- for example, if there’s an emergency and you need to pay a large set of unexpected expenses, or if you see a time-sensitive investment opportunity and need to jump on it asap.
Examples of Liquid Assets
- Cash (dollar bills, money in a checking account, etc.)
- Treasury bills/bonds
- Stocks in publicly traded companies
- Mutual funds
- Certificates of deposit
- Investment-grade corporate bonds
Examples of Illiquid Assets
- Real estate (homes, land, etc.)
- Private equity/venture capital assets
- Intellectual property