Liquidity

Beginner

Liquidity is how quickly and easily an asset can be turned into cash without losing much of its value. For a person or business, it also means having enough cash available to meet bills as they fall due.

Cash is the most liquid asset, because it can be spent immediately. Money in a current account is almost as liquid. Shares of large companies are fairly liquid, because they can usually be sold within a day or two at a price close to their market value. A house is much less liquid: selling it can take months, involves fees and may require a lower price if the sale is rushed.

For example, someone with 50,000 in shares and 300,000 in property may be wealthy but still struggle to pay an unexpected bill of 8,000 next week if they have little cash. They have assets, but not enough liquidity.

Businesses face the same issue. A profitable company can still fail if customers pay slowly and it cannot pay its staff and suppliers on time.

There is usually a trade-off between liquidity and return. Highly liquid assets, such as cash, tend to earn less, while less liquid assets, such as property or private investments, may offer higher returns in exchange for being harder to sell quickly.

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