Understanding Financial Liquidity

Understanding financial liquidity

Liquidity means how quickly you can get your hands on your money. In simpler terms, liquidity is to get your money whenever you need it.

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices.

Money is the most liquid asset. However, some investments are easily converted to money like stocks and bonds. Since stocks and bonds are extremely easy to convert to money, they’re often referred to as liquid assets.

Coins, stamps, art and other collectibles are less liquid than money if the investor wants full value for the items. For example, if an investor was to sell to another collector, they might get full value if they wait for the right buyer. However, the item could be sold at a discount to its value if done through a dealer or broker if money was needed.

Land, real estate, or buildings are considered the least liquid assets because it could take weeks or months to sell them.

Before investing in any asset, it’s important to keep in mind the asset’s liquidity levels since it could be difficult or take time to convert back into money.

The level of liquid assets you should keep on hand largely depends upon your estimated monthly expenses and other personal factors. You should discuss with your financial planner or investment advisor. In all cases, you should be able to support yourself and family for at least a month or two; most financial planners agree that six months is ideal.