A liquid asset is a reference to available cash or an asset that can be easily converted to cash. An asset that can be easily converted to cash is similar to cash itself in that the asset can be sold with little impact on its value.
Liquid assets are generally considered the same as cash, as their value remains largely the same when they are sold. Several factors must be present for a liquid asset to be considered liquid: it must be in an established market, with a large number of interested buyers, and with the ability to easily transfer ownership. Liquid assets are the most basic type of asset, used by both consumers and businesses.
Cash on hand is considered a liquid asset because of its ability to be easily accessed. Cash is legal tender that a company can use to settle its current liabilities. For example, money in your checking account, savings account, or money market account is considered liquid because it can be easily withdrawn to settle liabilities.
- A liquid asset is available cash or an instrument that has the ability to be easily converted to cash.
- Liquid assets are perceived as essentially identical to cash, as they do not lose value when sold.
- A cash equivalent is an investment with a short-term maturity that can be quickly converted to cash, such as stocks, bonds, and mutual funds.
- Liquid assets differ from illiquid assets, such as property, vehicles, or jewelry, which can take longer to sell and therefore turn into cash and can lose value on sale.
Cash equivalents are typically investments that have short-term maturities of less than 90 days and are considered liquid assets because they can be easily converted to cash. Examples of cash equivalents include:
- Stocks and marketable securities, which are considered liquid assets because these assets can be converted to cash in a relatively short period of time in the event of a financial emergency.
- US Treasury Bonds and Bonds
- Mutual funds, a managed portfolio of investments in which the money of various investors is pooled and invested in a variety of different financial securities, including stocks and bonds (instead of buying shares of an individual stock, investors buy shares of a fund However, these transactions are executed by the fund manager or through a broker, rather than on an open market. Mutual funds are considered liquid since investors can sell their shares at any time and receive their money in few days).
- Money market funds, a type of mutual fund that invests in low-risk, low-yield investments like municipal bonds (like mutual funds, money market funds are also liquid investments).
Liquid assets (cash or cash equivalents) are used by both companies and consumers, and are perceived as the most basic type of asset available.
Illiquid assets are assets that can be difficult to liquidate quickly. Investments in land and real estate are considered illiquid assets because it can take months for a person or business to receive cash from the sale.
For example, suppose a business owns real estate and wants to liquidate because it has to pay a debt obligation within a month. The property sale process can take more than a month as it will take time to find an investor, negotiate and agree on a price, and set the sale closing. If the business wants to sell the property quickly, the property could be sold at a price lower than its current market value, or it could be sold at a loss to the owner. In this case, trying to liquidate a real estate investment can have a high impact on its value.
While liquid assets can be easily sold for cash and have a stable market price, illiquid assets cannot be quickly sold for cash and prices can be much more volatile.
Other types of assets
In general, anything that may be owned by an individual or entity that has, or is expected to have, economic value is an asset. The value of an asset is usually taxable. An example of this is the taxes on property left by someone who dies. These assets are often referred to as “equity”. Assets from an estate can be used to pay debts left by the decedent, or they can be distributed to beneficiaries as specified in the decedent’s will or trust.
Assets are generally classified as tangible or intangible assets. Tangible assets are physical in nature and have an easily determined material value in a public market. Tangible assets run the risk of being damaged, lost or stolen due to the actions of people or acts of nature. An intangible asset, on the other hand, is not physical in nature. An intangible asset could be goodwill, brand recognition, or intellectual property such as patents, trademarks, and copyrights.