Investor Facts: What Is Liquidity?

Posted on June 21, 2017 at 2:12 PM PST by

Liquidity is another way of saying cash. In the case of an investment, liquidity is easy access to buyers who will give you cash for that investment.

An investment position is liquid if it is in the form of cash or cash equivalents, such as a money market fund or other short-term holding.

The idea is that an investment is easily converted or already exists as cash. A liquid investment thus is easy to move and reinvest into something else, if necessary.

A business is said to be liquid if it has a cash in its accounts to deploy toward inventory, expansion or hiring.

liquidity

The opposite is not solid but “illiquid,” implying the absence of the flexibility of cash on hand.

Liquidity thus can be seen as how long it would take turn a given investment into spendable cash.

For instance, actual cash is accessible at any moment via a bank card or a quick trip to a branch. If you needed to make an investment today, cash is the most liquid way to make that decision.

There are forms of cash that are less liquid. For instance, a savings account might restrict you to six withdrawals per month.

Money invested in a certificate of deposit might require you to wait a month or six months or more to sell and recoup the cash or pay a stiff penalty.

Most common stocks can be sold in a day or so. Mutual fund investments, too. Generally, any investment that has a ready market of buyers could be considered liquid because selling will not take long and you can expect a fair price, if enough buyers exist.

Natural buyers

If an investment does not have ready buyers, it is less liquid by definition. Traders refer to illiquid markets to mean specific investments, usually exotic and thinly traded shares, that have few natural buyers.

It can get harder to find buyers for investments at a fair price if a market is falling sharply, creating a temporary form of illiquidity. You might have to sell and thus suffer a penalty on the price you get.

Then there are investments that are illiquid by nature. Physical objects such as a vehicle or a home, art work, coins and collectibles can be difficult to sell, even if there are good buyers out there.

Similarly, it can be hard to sell a business.

While it may be likely that you will find a buyer for your physical investments, that doesn’t mean there are no buyers or that you are not likely to get a good offer. It just takes more time.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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