What is an example of a liquid asset? Here is an article dedicated to giving you examples of liquid assets. Knowing whether an asset is liquid or non-liquid is one of the most important aspects of an investment. It’s really the first thing to ask yourself. This is in case you need money for an emergency, a better investment or whatever reason you’d like.
This article answers the following questions:
What Is a Liquid Asset?
What Is an Example of a Liquid Asset?
Why Are Liquid Assets Important?
What Are Non-Liquid Assets?
What Is a Liquid Asset?
A liquid asset is either cash or an asset that can be converted to cash quickly and without affecting its value. In other words, liquid assets include cash and short-term investments that can be easily converted to cash.
Why Exactly Is It Important to Know What A Liquid Asset Is?
Liquid assets are important because they are easily accessible. If an unforeseen expense or emergency financial situation occurs or you’d like to hurry and get into a new investment, you need to be able to access the funds quickly. An asset that is not liquid will not help you in this situation. This means you could have a high net worth but still be unable to use that money for an immediate gain.
There might also be times, such as applying for a mortgage, where you need to be able to show a certain amount of liquid assets. In the mortgage example, the lender wants to know that in the difficult financial situation mentioned above you will still be able to make your payments.
Examples of Liquid Assets
This one’s pretty obvious – cash is the most basic liquid asset. You don’t have to do anything special to access it; it’s ready to spend. On the other hand, it’s also easily stolen and probably not safe to keep too much on hand.
Money in a Bank Account
Funds on deposit in a bank account are the next most liquid asset. The money is easily accessible: If it’s a checking account you can spend it easily using a check or debit card. With either a checking or savings account you can withdraw cash at many convenient locations if you have an ATM card. Even if you need a larger amount – more than the ATM maximum, for example – or if you have a savings account and no ATM card linked to the account—you can still go to the bank to withdraw your money on demand. The only limiting factor in that scenario would be the hours the bank is open for business.
At the same time, money deposited into a bank account is safer than cash lying around the house. It’s much more difficult to steal and generally is insured by the FDIC up to $250,000. So this type of liquid asset is almost as available as cash and much more secure.
Certificates of Deposit
A certificate of deposit, or CD, is a type of investment where an amount of money is deposited and earns interest over a set period of time, until its maturity date. A CD is less liquid than a checking or savings account because the money cannot be withdrawn before the maturity date without incurring a penalty.
On the other hand, a CD earns interest at a higher rate than what would be earned in a regular savings account. For example, you might receive an annual percentage yield (APY) of .01% for a regular savings account but receive an APY of .50% – 1.75% if you deposit the same money into a CD account.
Most CDs obtained at banks are federally insured up to $250,000.
A CD is still a liquid asset because if you had to withdraw it before the maturity date you could do so in a relatively short period of time and for most CDs, without a large enough change in value to alter its status as a liquid asset. Depending on the specific CD, you would likely either forfeit interest earned or be required to pay a penalty fee.
Are stocks liquid assets? Really? Yes. Stocks, another liquid asset example, are shares of ownership of a corporation. Stocks vary widely in risk and potential for growth. In general, large, stable companies are less risky but offer less potential for growth, while smaller, fast-growing companies have more potential for growth and accompanying greater risk. Overall stocks are one of the riskiest liquid assets to own because there is no guarantee. While you could potentially make a lot of money, you could also potentially lose it all.
The liquidity level of stocks will vary depending on the specific stock. Stocks with a high trade volume will generally be more liquid than less-traded stocks since they can more easily be sold and with less variability in price.
Bonds are another type of investment asset, but they are more predictable and carry less risk than stocks. Bond holders receive coupon payments for interest earned at specified points between issuance and maturity and then a specified sum at the maturity date.
There are several different types of bonds. Government bonds, such as U.S. Treasuries, have the lowest risk; U.S. Treasuries are guaranteed by the U.S. government. The different types of U.S. Treasuries have a different amounts of time to maturity and different interest rates.
Corporate bonds, as the name suggests, are issued by companies rather than the government. Corporate bonds vary in risk from high quality to junk bonds. The bonds with the most risk generally have the highest yield and vice versa.
Bonds can be sold through a broker before the maturity date if the funds are needed. How selling before maturity affects the amount of cash received depends on the bond, interest rates, and brokerage fees.
Mutual funds use the pool of money from all investors to invest in a diverse portfolio of assets including stocks, bonds, and real estate. When you invest in a mutual fund, you get the benefit of diversity of assets and professional investing in exchange for a fee.
Mutual funds are liquid assets because the investor can redeem the shares at any time. Because the mutual fund has up to seven days to pay out the cash, mutual fund investments are less liquid than funds in a bank account.
What Are Non-Liquid/Illiquid Assets?
In contrast to liquid assets, non-liquid assets cannot be easily converted to available cash. Often it takes time to find a buyer for these types of assets. Assets which can be converted to cash quickly but lose a substantial portion of their value in the process are also non-liquid. Here are some examples of non-liquid assets:
Real estate is one of the least liquid of assets. If you own a piece of real estate and need to sell it for cash, several steps are required. These include finding a buyer and completing the legal process to transfer. You will likely also pay commission and other expenses. Selling real estate would not be a quick way to solve a financial problem.
Retirement accounts generally are not considered to be liquid assets because although you could cash them out if needed, the value would be greatly reduced. For example, if you decide to cash out your 401(k), you will have to pay income tax on the amount cashed out (in fact, 20% will be withheld by the plan administrator) plus a 10% penalty for early withdrawal. The loss of value makes the account non-liquid.
The same account might be considered a liquid asset, however, if the account owner is at least 59 ½ since he or she would no longer be subject to the penalty.
There are a wide range of valuable items that might be considered assets, from baseball cards to antiques to electronics to jewelry. However, the majority of these types of items would be considered non-liquid assets because they are not readily converted to cash. When they are, it is often at a reduced amount – you might be able to sell your used clothing instantly at the local resale store, but it is likely for pennies on the dollar. Higher value items require finding a willing buyer and maybe even a lengthy process including an appraisal, making these assets non-liquid.
So what is an example of a liquid asset? Well now you have many examples of liquid assets and examples of non-liquid assets. There are many different types of assets you might have in your portfolio – hopefully this article has helped you to determine which ones are liquid and which ones are non-liquid. Knowing examples of liquid assets will keep you from investing in the wrong things, based on your need for available funds.