Financial liquidity is the ability of an asset to be converted into cash. The example of a very liquid asset is stocks and bonds. Those assets can be easily converted into cash in days.
On the other hand, the large assets like plant, property, and equipment are not liquid, since investors may face difficulties to turn them into cash. For intake, a landlord may need weeks to months to sell his or her land.
The Detail Definition
As we all know, the most liquid asset is cash. But, we also have some investment that can be easily converted into cash, they are called a liquid asset. The example of that asset is stocks and bonds.
Meanwhile, the example of investment assets take may need a longer time to be converted into cash include restricted or preferred shares. They usually require a covenant to dictate the time and the way to sell it.
Besides, coins, art, stamps, and other collectibles things are also less liquid than cash, especially, when the investor wants to get the full value out of them. But, if the investor urgently needs the cash, then, he or she can sell it at a discount through a dealer or a broker.
Buildings, real estates, or lands are the least liquid asset. That is because selling them may take weeks to months.
Since asset liquidity will directly affect the profit, then, investors have to always consider it before they purchase an asset.
Financial Liquidity in the Market
Market liquidity is the ability of the market to let the asset to be purchased or sold quickly and easily. The example of it is the real estate market or a country’s financial market.
A stock market can be considered as a liquid market if the shares can be purchased and sold quickly. Besides, the trade should also own a little impact on the stock’s price. The stocks traded on the major exchange are typically liquid.
Once an exchange has a high volume, then, the bid price and the ask price are close to each other. That way, the stocks can be liquidated easily. Contrarily, a wider spread means a more illiquid stock market.
Besides, if you trade stocks, you need to also consider the time of the day. If you trade after hours, there are fewer traders participate in the market. Or, if you are trading foreign currencies in Asian trading hours, then the value of the Euro may be less.
