Liquid Assets: What They Are & Why They're Important (2024)

Liquid assets include cash and anything that can be converted into cash quickly and easily. Learn how they compare with other assets and why they're important for investors and companies alike.

Liquid Assets: What They Are & Why They're Important (1)

What Is a Liquid Asset?

A liquid asset is anything that can be converted to cash quickly. Liquid assets are important because they can be used to pay for liabilities or any unexpected expenses after the assets are quickly converted into cash.

Liquid Assets vs. Other Assets

Liquid assets differ from other assets in how quickly they can be converted into cash. However, there are some other ways in which liquid assets differ from non-liquid ones.

Aside from cash, liquid assets also have an established market with plenty of buyers and sellers, which is what makes it easy to convert them into cash. Additionally, the asset's market price shouldn't change significantly, reducing liquidity for future market participants.

It must also be easy to transfer the asset to other owners. Illiquid assets are held for the long term, while liquid ones can be accessed in the short term. Liquid assets can have lower rates of return than illiquid ones, although that is not always the case, as you will see from the list of examples below.

Tip: Cash is the most liquid asset, while some other assets have varying levels of liquidity depending on how quickly they can be converted into cash.

Why Are Liquid Assets Important?

As stated previously, liquid assets are important because they can be tapped easily to cover debt that's coming due or pay for unexpected expenses. People who suddenly find themselves out of work should be able to convert their liquid assets into cash to pay for their daily living expenses, if necessary.

Asset liquidity is also important for companies they because it reveals to investors how easily the company can pay off its short-term debts and liabilities.

Liquid Asset Examples

  • Cash
  • Short-term government bonds
  • Savings or checking accounts
  • Short-term certificates of deposit
  • Money Market funds
  • Exchange-traded funds (ETFs)
  • Mutual funds
  • Some stocks, although they can become illiquid if the markets are frozen
  • Some bonds, although they can become illiquid if the market is frozen
  • For companies, accounts receivables and inventory (although to liquidate these quickly, companies will often receive less than full value)

Tip: Not all stocks are liquid because for some stocks there is less trading and fewer buyers.

Are Mutual Funds Considered Liquid Assets?

Mutual funds, as well as ETFs, are usually considered liquid assets because shares can easily be sold for cash to a large pool of potential buyers. Investors can receive cash in a matter of days after selling their shares in a mutual fund. Of course, if markets are falling, the investor will have to accept selling equity mutual funds (as well as stocks and equity ETFs) at lower prices than where these assets were valued previously.

Examples on Non-Liquid Assets

  • 401k or traditional IRA before retirement age
  • Property (house, manufacturing plant)
  • Factory equipment

Is a 401k a Liquid Asset?

A 401k is not a liquid asset until investors reach retirement age. Before retirement age, investors cannot pull the money out without facing penalties, except in certain situations. However, when they reach retirement age, they can pull money out of their 401k whenever they want.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Liquid Assets: What They Are & Why They're Important (2024)


Liquid Assets: What They Are & Why They're Important? ›

Anything of financial value to a business or individual is considered an asset. Liquid assets, however, are the assets that can be easily, securely, and quickly exchanged for legal tender. Your inventory, accounts receivable, and stocks are examples of liquid assets — things you can quickly convert to hard cash.

What are liquid assets and why are they important? ›

A liquid asset is an asset that can easily be converted into cash in a short amount of time. Liquid assets include things like cash, money market instruments, and marketable securities. Both individuals and businesses can be concerned with tracking liquid assets as a portion of their net worth.

Why is it important to maintain liquid assets? ›

Liquid assets are a particularly important safeguard to have if you experience financial hardship and need cash fast. Your liquid assets also help contribute to your overall net worth.

What is the most liquid asset and why explain your response? ›

Liquidity is a metric of how easily something can be converted to cash. The faster an asset can be converted to pure cash without impacting its actual value (or with the least possible impact on its value), the more liquid it is. For example, the most liquid asset you can have is cash.

What are three examples of liquid assets? ›

Liquid Assets Example

For example, bonds, mutual funds, stock's share, and money market funds are a few examples of investment liquid asset. Such assets are converted into cash very easily whenever there are any financial crises. Cash – It is an asset that can be accessed very easily and quickly.

Why do people prefer liquid assets? ›

Liquidity, or your business's ability to quickly convert assets into cash, is vital on multiple fronts. These resources help you weather financial challenges, secure credit, and settle liabilities with short notice.

What are liquid assets for dummies? ›

Liquid assets refer to cash on hand, cash on bank deposit, and assets that can be quickly and easily converted to cash. The common liquid assets are stock, bonds, certificates of deposit, or shares.

Why is being liquid so important? ›

Liquidity provides financial flexibility. Having enough cash or easily tradable assets allows individuals and companies to respond quickly to unexpected expenses, emergencies or business opportunities. It allows them to balance their finances without being forced to sell long-term assets on unfavourable terms.

What are the advantages and disadvantages of liquid assets? ›

Liquid funds are ideal for low-risk investors looking to park surplus cash for the short term. The biggest advantage of liquid funds is that it offers superior returns than bank deposits. But the returns on liquid funds is not guaranteed. This is the biggest disadvantage of liquid funds.

What is the value of liquid assets? ›

Bottom Line. Liquid assets are basically cash or cash equivalents that can be easily and efficiently converted into money. You'll subtract your liabilities from these assets when calculating your liquid net worth.

Why is liquidity important for a business? ›

A company's liquidity indicates its ability to pay debt obligations, or current liabilities, without having to raise external capital or take out loans. High liquidity means that a company can easily meet its short-term debts while low liquidity implies the opposite and that a company could imminently face bankruptcy.

Why do firms hold liquid assets? ›

Liquidity matters in case unexpected financial situations come up and you need funds on short notice. Liquid assets ensure that your business has the resources necessary to satisfy your liabilities or obligations. The more liquid assets your company holds, the more flexible and agile your business is.

Why would a person want assets with liquidity? ›

Liquid assets, however, can be easily and quickly sold for their full value and with little cost. Companies also must hold enough liquid assets to cover their short-term obligations like bills or payroll; otherwise, they could face a liquidity crisis, which could lead to bankruptcy.

What is the most liquid asset in the world? ›

And cash is generally considered the most liquid asset. Cash in a bank account or credit union account can be accessed quickly and easily, via a bank transfer or an ATM withdrawal.

What is a liquid asset also known as? ›

A liquid asset is something that you own that can be easily converted into cash and that too in a short amount of time (less than 90 days). Assets that can be considered as liquid assets are cash, checking or savings accounts as well as certain types of investments.

What are high quality liquid assets? ›

The high-quality liquid assets (HQLA) include only those with a high potential to be converted easily and quickly into cash (in times of distress). HQLA are cash or assets that can be converted into cash quickly through sales (or by being pledged as collateral) with no significant loss of value.

What is the importance of liquid funds? ›

A liquid fund investor can keep his or her money for as long as necessary. Although there is a minor exit load for redemptions within seven days, liquid funds have flexible holding periods. This allows for simple entry and exit while delivering safe, market-linked returns for the duration of the investment.

Why is liquidity important to a business? ›

A company's liquidity indicates its ability to pay debt obligations, or current liabilities, without having to raise external capital or take out loans. High liquidity means that a company can easily meet its short-term debts while low liquidity implies the opposite and that a company could imminently face bankruptcy.


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