You’ve got money, but do you have access to it?
Weird question, right? But it’s an important one, especially given times like these when the economy seems to be constantly teetering on the brink.
What is the difference between liquid and illiquid assets? These 5 facts discuss the types of assets and how they can impact your financial well-being.
What Is the Difference Between Liquid and Illiquid Assets?
Before addressing what liquid versus illiquid assets are, it’s important to understand what an asset is. Assets, financially-speaking, are anything of market value. Common assets include things like:
- Stocks and Bonds
But how available is each of these assets when it comes to cash value? Translation? How quickly can you get cash for an asset? If you can translate (i.e., sell) that asset into cash relatively easily, and at fair market value, that asset is considered liquid.
Liquidity refers to how quickly and easily an asset can be bought or sold on the market for its innate value.
For example, assets that have liquidity are cash, money market accounts, and stocks. Cash is obviously the most liquid of the above assets.
Assets like real estate and antiques are relatively illiquid. Illiquid means that their cash value is tied up in some way, either by the market or because the process to turn them into cash is long and arduous.
For example, there are times when tragedies, such as September 11th, shut down markets completely. In this case, investors did not have access to their stock holdings, which were already less liquid, to begin with.
If you own a house in a down market, you may not be able to sell that house readily. It may stay on the market for months, even years, before a homebuyer purchases it and translates that asset into cash for you.
A home, especially in this instance, is an illiquid asset. Its like “money, money everywhere, and not a drop to spend!”
Whether you are an investor, an individual, or even a small business, you need to understand the importance of liquid assets. Not having enough cash on hand can spell trouble.
For example, if you are a business, they say “cash is king,” right? It’s true. If you have several thousand lingering in accounts receivable and a hundred thousand dollar piece of amazing manufacturing equipment, you’re technically asset-rich on paper.
But guess what? If you don’t have the cash to pay rent, bills, employee salaries, you’re sunk! Being asset rich but cash poor is not the way to go.
On the other hand, if you have too much cash and not enough illiquid investments, you may lack long-term stability. One of the benefits of most illiquid assets is that they’re investments that tend to increase in value over time.
Know Where You Stand
So what is the difference between liquid and illiquid assets? If you want to know where you stand financially, it’s a question you need to be able to answer with confidence.
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