Liquid

Liquid summary:

• Being liquid means having access to the cash you need at a moment's notice.

• Assets that are liquid can be easily and quickly converted to cash.

• Stocks are generally considered liquid assets. Real estate and art, since usually they can’t be immediately sold for cash, aren’t generally considered liquid assets.

Liquid meaning and definition

A person who has immediate access to cash, such as a healthy emergency fund or a substantial CD account, could be considered liquid. A liquid asset is one that can be quickly converted to cash. Access to liquid assets is important in case you lose your job or have surprise bills to cover.

Key concept: Immediate access to cash or an asset that can be quickly converted to cash.

More on liquid

Cash in your savings or checking account is the most liquid asset you can have. Other types of liquid assets include:

• High-yield savings accounts

• Money market accounts 

• Stocks

• Exchange-traded funds (ETFs)

• Money market funds

• Certificates of deposit (CDs)

Bonds can sometimes be considered liquid, depending on the type of bond and market conditions. Real estate and artwork are generally not considered liquid assets because it can take time to convert them to cash.

Liquid: a comprehensive breakdown

Having more liquidity could make you more financially stable, because you’re able to handle financial emergencies, pay your bills on time, and avoid relying on high-interest debt. 

Being liquid is one part of a person’s financial picture. For example, you could be liquid but not stable if you have plenty of cash but a lot of debts or no long-term financial plan. If you have a lot of assets that are difficult to liquidate, job loss or an unexpected expense could land you in debt. That’s because you may not be able to cover a surprise bill immediately. 

Liquidity is important because a financial emergency can arise at any time. That’s why people are told to keep their emergency funds in cash. 

Being liquid could also put you in a strong position to take advantage of financial opportunities. If you want to buy a used car and a great deal opens up, the more cash you have on hand, the easier it is to complete that transaction before the car is sold to someone else. 

A liquid asset is one that can easily and quickly be converted to cash, but if you need to liquidate in a hurry, that could mean losing money. For example, stocks are considered a liquid asset. They can be sold quickly. But if you have to sell shares of a stock at a time when their value is lower, you could lose money—or at least not be able to raise as much as you might have hoped.

Real-life example of a liquid asset

You need $10,000 for an emergency home repair, and you have $5,000 in cash savings. For the rest of the repair, you could either sell some stocks in your portfolio or a painting you own that you know is worth $5,000.

You can sell the stocks right away, but the painting will likely take more time. First, you’d need to find a buyer and make arrangements for that transaction. You might also want to have the painting appraised by a professional so you can understand its value. Selling a physical object may also have practical issues to consider, such as packing and shipping. That makes the stocks a liquid asset and the painting an illiquid asset.