7/7/2023 0 Comments Liquid assets examplesLiquidity terms amongst these funds will vary. Other asset classes that sit on the illiquid side include Hedge Funds and Private Market Funds. There is real estate that is more desirable, and there is real estate that is not so desirable. Note that degrees of liquidity within the illiquid side will vary just as on the liquid side. To put it into perspective, buyers of $10,000,000 houses are not as common as buyers of $100 stocks. Therefore, real estate, like collectibles and art, is an illiquid asset. The ability to convert real estate into cash or into another asset type is on the tougher side of things. Looking at an example of an illiquid investment, unlike stocks and bonds, real estate can’t be traded in an exchange daily. As a rule of thumb, the more illiquid an investment is, the greater the risk and associated liquidity premium will be. This added compensation that is built into the return of an investment is referred to as the liquidity premium. Typically, with illiquid investments, an investor will require compensation for the added risk of parking their capital in an asset that may not be able to be sold for a long duration. “Illiquidity” in essence occurs when an asset cannot be traded or sold with ease and without incurring a loss in value relative to its “fair market” value. The most illiquid stocks will be those that are consistently overlooked by the crowd, with small floats, limited public interest from investors, and are often some of the least valuable securities within the equity markets. These companies are targeted by retail and institutional investors alike, and owing to the large available quantity of securities, are traded with high frequency. The stocks with higher levels of liquidity will be the mega caps, in other words, companies that have achieved market capitalizations of more than $200 billion. Often the most important factor in determining liquidity is the available supply of bids and offers (e.g., market makers indicating the prices at which they would purchase or sell a security, respectively). Within these asset categories, nuances arise that offer varying degrees of liquidity. In the liquidity scale, instruments such as marketable securities like equities or stocks come next, and then debt securities like bonds. For example, a thinly traded, low volume, over-the-counter penny stock may be much harder to sell out of than, say, a tangible asset like a popular luxury purse.Ĭash is considered to be the most liquid asset, followed by cash equivalents like certificates of deposit. However, tangibility is not necessarily a definitive indicator of an asset’s liquidity. On the other side of the spectrum, we have cash, which is universally accepted to be the most liquid asset because of the ease with which it can be converted to other assets. Tangible assets include art, collectibles, and real estate.įrom a liquidity standpoint, tangibles can be harder to convert to other assets like cash, thus they are generally considered illiquid assets. Intangible assets include stocks, bonds, and other securities. Assets can be both tangible and intangible. In the world of finance, liquidity refers to the ease with which an asset can be converted to another asset, typically cash, without affecting its market price – in other words, how easily the asset can be “liquidated” in the market. For proper portfolio management, it is essential to have a solid grasp of the liquidity profile of each investment. Investments come in a variety of shapes and sizes, and they all have different degrees of liquidity. In this blog, we seek to outline some of the pros and cons of liquid and illiquid investments. Liquidity is perhaps one of the most important elements an investor must consider when analyzing an asset. illiquid assets: should we prefer one or the other, or is a mix better? As with all investments, it depends on a variety of factors.
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