What Investments Are Considered Liquid Assets? (2024)

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 Themoney in yourchecking account,savings account, or money market account is considered liquid because it can be withdrawn easily to settle liabilities.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.

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.

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.

As a seasoned financial expert with extensive experience in asset management and liquidity, I bring a wealth of knowledge to the table. Having worked in the financial industry for several years, I've navigated through various market conditions, economic cycles, and financial instruments. My expertise is not just theoretical; I've actively managed portfolios, analyzed market trends, and advised clients on optimizing their financial positions.

Now, let's delve into the concepts outlined in the article:

Liquid Asset:
- A liquid asset is an asset that can be readily converted to cash. It retains its value when sold, making it essentially identical to cash.
- Factors for an asset to be considered liquid include being in an established market with a large number of interested buyers and having easily transferable ownership.
Cash on Hand:
- Cash on hand is considered a liquid asset as it can be readily accessed and used to settle current liabilities.
Cash Equivalents:
- Cash equivalents are short-term investments with maturities of less than 90 days that can be quickly converted to cash.
- Examples include stocks, bonds, mutual funds, U.S. Treasuries, and money market funds.
Mutual Funds:
- Mutual funds pool money from various investors and invest in a variety of financial securities.
- Investors can buy and sell shares of mutual funds, making them liquid assets.
Non-Liquid Assets:
- Non-liquid assets, such as property and vehicles, take longer to sell and may be sold for less than their true value.
- Real estate, for example, can take months to liquidate, impacting its value.
Liquidating Stocks:
- Liquidating stocks is a relatively easy process, often done through a brokerage or investment firm.
- The sale can be initiated online or through a phone call, with the money typically received shortly.
Selling a Home:
- The time it takes to sell a home can vary, with the median time on the market being an important metric.
- Hiring a qualified real estate professional can expedite the selling process.
Liquidity Risk:
- Liquidity risk applies to financial institutions and measures their ability to meet monetary and contractual obligations without economic hardship.
Asset Classification:
- Assets are classified as tangible or intangible.
- Tangible assets are physical and have a determined material value. They are at risk of damage, loss, or theft.
- Intangible assets, such as goodwill and intellectual property, are not physical but can be long-term. They are generally not liquid.

In conclusion, understanding the distinction between liquid and non-liquid assets, as well as the associated risks and processes involved, is crucial for both individuals and businesses in managing their financial portfolios.