Liquid asset is cash in hand or assets that can be easily converted into cash. An asset that can be easily converted into cash same cash, because the asset can be sold with little effect on its value. (For more, see: understanding financial liquidity.)
Cash on cash is considered a liquid asset because of its ability to be easily accessed. Cash is legal tender, which the company may use to settle its current obligations. For example, the money in your checking account, Savings account or money market account is a liquid because it can easily be withdrawn to repay debts.
Cash equivalents are generally investments with short maturity of less than 90 days and are considered liquid assets because they can be easily converted to cash. Examples of equivalents include:
- Stocks and securities are considered liquid assets, since these assets can be converted into cash within a relatively short period of time in case of financial emergency.
- U.S. Treasury notes and bonds.
- Mutual funds is a managed portfolio of investments where money from different investors are combined and invested in various securities, including stocks and bonds. Instead of buying an individual stock, investors buy shares of mutual funds. However, these operations are carried out by the Fund Manager or through a broker, and not on the open market. Mutual funds are considered liquid because investors can sell their shares anytime and receive your money within a few days.
- Money market funds-a type of mutual Fund that invests in low-risk low-yield investments such as municipal bonds. Similar to mutual funds, money market funds are also liquid investments.
Illiquid assets-assets that may be difficult to liquidate quickly.
- Land and real estate investments are considered liquid assets because it may take several months for a person or company to receive cash from the sale.
- For example, assume that the company owns real estate and wants to eliminate because he needs to repay the debt within a month. The process of selling real estate may take longer than a month, as it takes time to find the investor, to negotiate and agree on a price, and set closing for sale. If a company wants to quickly sell the property, the property may sell at a lower price than its current market value, or it can be sold for a loss to the owner. In this case, trying to liquidate real estate investments can have a big impact on its value.
As a rule, investments are considered liquid assets because they can be easily sold, depending on the type of investment. Liquid assets tend to have stable market price. Illiquid assets cannot be quickly sold for cash. However, although liquid assets are easily converted into cash, they can be negative consequences of inflation. For related article, please see that the effect of inflation on liquid assets?