What is a Liquid Asset?

Liquid assets are great if you want to have enough money to cover possible emergencies or living expenses. But what is a liquid asset and how can it help you? You’ll find that and much more in the following paragraphs.

What Are Assets?

First things first, let’s establish what an asset is in general. An asset is known as a resource of value that you can turn into money. They are usually owned by governments, companies, and even individuals. These assets can even generate revenue for companies. Assets can be personal or business assets.

Now, let’s move to liquid assets. Liquid assets are references to cash on an asset or on hand that you can turn into cash. More often than not, liquid assets are already considered the same as cash as their value usually stays the same when they are sold. This is because you can easily sell a liquid asset and it will not have any impact on its value.

For an asset to be categorized as liquid, there are a few requirements that it should follow. For example, it has to be a part of an established market, and there must be many people willing to become buyers while having the ability to easily transfer ownership. Basically, liquid assets are probably the most basic asset type, as it’s common among both consumers and businesses.

It’s important to know that liquid assets are not the same as their fixed counterparts or their illiquid. In reality, these investments are harder to turn into cash as there are fewer people interested in buying them.

Difference Between Liquid and Non-Liquid Assets

Liquid assets are not the only available assets out there. You can also find non-liquid assets. But what is the difference between liquid and non-liquid ones?

Liquid Assets

As mentioned, liquid assets are those that can be quickly converted into cash while the market value doesn’t change. The most liquid type of asset you can have is cash on hand, and then funds you can withdraw from a bank account. With this, you don’t have to wait until a conversion is done. The money can be instantly accessed in case you need it. For example, if you suddenly need to have your vehicle or another thing repaired, or you require medical attention that costs a lot of money, you can easily access your money thanks to asset liquidity.

Liquid assets can be influenced by several factors, which will pretty much have a say in how liquid the asset is. These factors include how easily ownership can be transferred, how established the market is, and how much it will take for the asset to be sold.

Non-Liquid Assets

Non-liquid assets are also known as illiquid assets. The main thing that sets them apart from liquid assets is the fact that they cannot be converted into cash quickly. What you have to do to find the value is to first sell the asset to tap into the value, so ownership has to be transferred in this situation. Unlike liquid assets, you will have to wait months and even years to find someone to buy your non-liquid asset. You can also sell them quickly, but this will usually influence their value negatively.

Types of Liquid Assets

We established what liquid assets are, but what are the different types of liquid assets that one can own? It’s important to know these categories because it will help you understand the liquidity they offer. Keep in mind that not all assets can be sold for money instantly without any consequence. You can expect to take a loss on your sale when you sell the asset.

Here are the common types of liquid assets available:

Certificates of Deposit

Certificates of deposit, also known as CDs, are assets that can make you earn higher APYs compared to savings or checking accounts. However, when withdrawing, it will be much harder to do so due to certain restrictions that are in place. If you don’t let the CD mature before withdrawing, you may have to pay a penalty, which is usually a few months of interest. The exception here is no-penalty CDs – they earn lower APYs.

Cash

The most common type of liquid asset is cash. You can hold ATM withdrawals and physical currency. Other than that, you can gain access to your cash through peer-to-peer payment apps or checking accounts.

Stocks

You can sell equity on stock exchanges pretty quickly, and in some cases, even in an instant. Stocks that are publicly traded are usually considered very liquid, and as a result, the cash they offer will be received in a matter of days.

Mutual Funds

Mutual funds are assets that can be traded only once a day, at the market stocks, and they are less liquid compared to other types of liquid assets.

ETFs

ETSs, or exchange-traded funds, are invested funds traded similarly to stock on public exchanges. Thanks to that, they are quickly sold and less risky compared to individual stocks, for instance.

Bonds

Bonds are usually purchased by investors so they can be held until they reach their maturity date. When it comes to trading bonds, the secondary market is very vast. If you sell bonds, you may end up getting less than the amount you bought them for.

T-Bills and T-Bonds

These assets are very liquid and stable. They are very safe and you can instantly sell them for cash on the secondary market, even if you want their value before they reach maturity.

Types of Non-Liquid Assets

Non-liquid assets cannot be sold or turned into cash quickly. Some types of non-liquid assets include:

Collectibles

These could be artwork, antiques, jewelry, baseball cards, and anything that can be difficult to value.

Real Estate

Real estate can take weeks or months to sell. Even just setting up the arrangements for a reverse mortgage or home equity loan could take a long time.

Estates

You must pay the debts and assess the taxes before you can access an estate’s assets. This may take years.

Private Equity

You can invest in a private equity asset, but there are many restrictions that you’ll have to deal with.

Stock Options

Stock options are usually offered by companies to their employees. Although they have a lot of value, they are illiquid. So, it takes years before you can actually own the stock.

Intangible Assets

These represent ideas or concepts with value. It could include brand recognition, goodwill, and reputation. However, it’s hard to find their value, which is what makes them illiquid.

Why Asset Liquidity Matters

Asset liquidity is very important in business, mostly because it shows whether you are ready to deal with emergencies or economic changes. They also show if you know how to put cash to good use. A liquid asset can be very useful when it comes to getting cash for emergencies, which range from personal emergencies to industry-specific ones.

Besides, someone with multiple liquid assets will usually get better loan terms and interest rates, which is essential for startup businesses.

Conclusion

Liquid assets can be very useful, which is why it’s important to have them. They can help you when you need money the most. Make sure you remember the difference between the liquid and illiquid ones if you want to sell them for cash. As always, check out Stilt for more information on assets, banks, and more.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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