A liquid asset is a reference to cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value.
Liquid assets are usually seen as the same as cash, as their value remains largely the same when 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 for ownership to be transferred easily. Liquid assets are the most basic type of asset, used by consumers and businesses alike.
Cash on hand is considered a liquid asset due to its ability to be readily accessed. Cash is legal tender that a company can use to settle its current liabilities. For example, the money in your checking account, savings account, or money market account is considered liquid because it can be withdrawn easily to settle liabilities.
Liquid & Illiquid Assets
- A liquid asset is either available cash or an instrument that has the capacity to be easily converted to cash.
- Liquid assets are perceived as being essentially identical as cash, as they dont 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 non-liquid assets, such as property, vehicles or jewelry, which can take longer to sell and therefore convert to cash, and may lose value in the 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 readily 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
- U.S. Treasuries and bonds
- Mutual funds, a managed portfolio of investments wherein money from various investors is pooled and invested in a variety of different financial securities including stocks and bonds (Rather than purchase shares of an individual stock, investors buy shares of a mutual 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 within days.)
- Money-market funds, a type of mutual fund that invests in low-risk low-yielding investments like municipal bonds (Similar to mutual funds, money market funds are also liquid investments.)
Liquid assets—cash or cash equivalents—are used by both businesses and consumers, and are perceived as being the most basic type of asset available.
Non-liquid assets are assets that can be difficult to liquidate quickly. Land and real estate investments are considered non-liquid assets because it can take months for a person or company to receive cash from the sale.
For example, suppose a company owns real estate property and wants to liquidate because it has to pay off a debt obligation within a month. The process of selling the property may take longer than a month since it will take time to find an investor, negotiate and agree on a price, and set up the closing for the sale. If the company wants to sell the property quickly, the property might sell for a lower price than its current market value, or it could sell for 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, non-liquid assets cannot be quickly sold for cash and prices can be much more volatile.
Other Types of Assets
In general, anything that can 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 often taxed. One example of this is taxes levied on assets left by someone who dies. These assets are often referred to as an estate. Assets in an estate may be used to pay debts left by the decedent, or they may be distributed to beneficiaries as specified in the decedents will or trust.
Assets are usually classified as either tangible or intangible assets. Tangible assets are physical in nature and have an easily determined material value on a public market. Tangible assets are at risk of being damaged, lost, or stolen due to the actions of people or acts of nature. An intangible asset, by contrast, is not physical in nature. An intangible asset could be such things as goodwill, brand recognition, or intellectual property like patents, trademarks, and copyrights.