Liquid investment definition
/What is a Liquid Investment?
A liquid investment is any investment that can be easily converted into cash without having a significant impact on its value. In addition, it must be a simple matter to transfer ownership in the asset to another party. The sum total of these investments can be aggregated and compared to a company’s short-term liabilities to see if there are sufficient liquid investments on hand to pay off the liabilities, which is a key indicator of corporate liquidity .
Examples of Liquid Investments
Here are several types of liquid investments:
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Cash . This is the ultimate fungible asset, since it is a perfect store of value.
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Money market funds . These funds can be converted into cash within one day, and have no risk of loss.
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Shares that trade on an active exchange . These shares can be converted into cash within a short period of time, though there is a risk of loss in value, depending on changes in the market price.
In all cases, it is easy to transfer these assets to a third party, and there is a ready market for them.
Examples of Illiquid Investments
Investments are not considered to be liquid when it takes a significant amount of time to convert them into cash, or if the act of selling them reduces their value. For example, real estate can take a long time to sell, and so is not classified as a liquid investment. Or, the shares of a company that are thinly traded cannot be sold in bulk without causing a significant downward shift in their price, and so are also not considered to be liquid.
Liquid Investment FAQs
Can a publicly traded security still be illiquid?
Yes. A publicly traded security can be illiquid if trading volume is low, bid-ask spreads are wide, shares are closely held, or only a small float is available. Large orders may move the market price, require staged sales, or force discounts. Exchange listing does not guarantee easy conversion into cash.
