Liquid Asset Explained

What is a Liquid Asset?

A liquid asset is any financial resource that can quickly be converted to cash. Liquid assets are a basic form of asset used by investors, suppliers, and consumers.

In addition to a quick conversion to cash, a liquid asset can be regarded as cash itself, or any negotiable asset that can be transferred or accepted as cash. In most instances, financial professional or experts will classify an asset as “liquid” if the good can be converted into cash within a period of 20 days.

Currency as a form of Liquid Asset

Coins and currency are the most fundamental forms of liquid assets. The liquidity of such assets stems from the fact that both coins and currency are immediately recognized as legal tender for purchases and used to diminish outstanding debts. The circulation of such liquid assets is controlled by an authoritative power (typically a treasury department of a central government) to maintain a suitable money supply as to effectively control inflation and the overall prices of goods.

Holders of capital assets or investments will aim to maximize their liquidity. Those who do not possess liquidity may fall victim to missed opportunities (in regards to potential profits through investment), fluctuating rates of inflation or interest rates, as well as mounting debts.

Other Types of Liquid Assets

In addition to currency, there are several examples of liquid assets that are used by both businesses and private consumers or investors. For instance, monies deposited into a checking or savings account are considered to be liquid assets, since the funds are readily accessible and can be used to settle or repay debts. Through the advent of debit cards, consumers, investors and businesses have greater access to liquidity; prior to the creation of debit cards, liquidity relied on an individual travelling to a bank to withdraw his or her funds.

Along with savings or checking accounts, money market funds, bonds, mutual funds, and the cash value found in a life insurance policy are all examples of interest bearing investments that may undergo a liquidation process to provide cash when necessary. Although the actual liquidity of each investment or asset type may vary, the key characteristics in regards to liquidity is the length of time that such assets can be converted into cash. By selling the aforementioned assets, the former owner has the ability to obtain cash in a fairly quick and simple process.

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