Liquidity: What is it, characteristics and examples - GovtVacancy.Net

Liquidity: What is it, characteristics and examples - GovtVacancy.Net
Posted on 24-10-2022

Liquidity: What is it, characteristics and examples

Converting an asset into cash involves two things: time and cost. The amount of time and the price to pay to carry out this operation depends on the level of liquidity of the said asset.

The more liquidity, the less time and money this action will require. The opposite happens, if an asset has little liquidity, the greater the time and/or cost it will take to exchange it for cash.

It is a concept that defines the level of accessibility that a company or person has to obtain monetary resources.

Definition of liquidity

Liquidity is the ability of an asset to be converted into cash quickly and without losing its value.

Therefore, the greater the liquidity, the faster an asset has to be converted into cash without affecting its value.

On the contrary, the lower the liquidity, the greater the delay and/or the greater the loss of value, an asset has to be converted into cash.

For example, the shares of a company are liquid assets because they can be sold quickly at a suitable value.

On the other hand, a house is an asset with little liquidity (illiquid), since its process and closing of the sale are much greater. Rarely can a property be sold quickly for a good price. And those who want to get a quick sale must usually do so by sacrificing a significant percentage of its value .

Money: The most liquid asset

Money is the most liquid asset that exists since it represents liquidity itself.

However, this is not always the case, since there may be legal tender currencies that suffer from inflation or hyperinflation and, therefore, lose liquidity, since the population would lose confidence in these currencies and would stop using this means to choose other more reliable resources.

Characteristics of liquidity

  • Quality that a company or person has to get cash.

  • They are assets that can be sold at any time or relatively quickly. This speed depends on the simplicity of the process of buying/selling the asset.

  • Liquidity allows you to meet short-term obligations at a business, family, or personal level.

  • Liquid assets have low commissions. That is, they do not have significant losses when converted into cash.

  • That an asset can be sold quickly does not necessarily mean that it has high liquidity, since it may be the case that a property is sold for a value below its real price due to a specific need of the owner.

Examples of liquid assets

  • Actions.
  • Bonds.
  • Foreign exchange.
  • Investment funds.
  • Raw material.

Examples of Illiquid Assets

  • Estate.
  • collectible items
  • Art.
  • Antiques.

Advantages of liquidity

  • It allows people or companies to face short-term expenses.

  • It grants the ability to solve emergencies effectively.

  • Helps finance business operations.

  • Having good liquidity is a way to demonstrate financial security, which helps improve the image of the company and makes investors feel more comfortable, as well as attracting other potential investors.

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