For those who want to invest but are not interested in assets that take a long while to yield profit, making liquid investments is your way out.
One major indecision that accompanies long-term investment is the question of, how soon would it yield profit? What if I can’t wait long and want to pull my money out? Or worst of all, what if I need money for an emergency?
A liquid investment is a form of investment that allows you to easily convert it to cash. Basically, they are also called cash equivalent because you can convert them to money without losing their value. The basic qualification for an investment to be liquid is that it must be easy to transfer and there must also be a high demand for it in the market.
What investments are liquid?
Liquid investments are considered a cash equivalent. They are investments that have a short-term maturity date of fewer than 90 days and can be easily converted into cash. Investments that are liquid do not lose value when sold.
Non liquid investments
Nonliquid investments are the opposite of liquid investments. They are difficult to liquidate and usually take months for you to receive cash from their sales. Good examples of this include real estate properties and land. For example, if you need to convert a land asset into cash to pay off a debt, the process usually takes time. Firstly, you’d have to find a buyer, then negotiate a price, and then set a date for other paper works. Should things lag, you might even be forced to sell it for less than its actual value. This is a sum-up of what a nonliquid investment is.
Best liquid investments
The best liquid investment are more or less down to choice. Basically, some prefer to invest in the stock market and treasury bills, while others prefer mutual or money market funds. In the end, its down to the specific investment itself, instead of a general rule of one being better than the other. You have to consider factors like the potential returns, tenor, associated risks before making a decision.
Liquid investment examples
Examples of liquid investments include:
Stocks and marketable securities
These investments are related to the stock market where you purchase stock options that you can sell off for a higher price. Also, you receive dividends depending on the profit declaration of the company.
Treasury bills and Bonds
These are bonds and treasuries issued by a government that people can purchase. Purchasing treasury bills or bonds sets you up for future earnings based on a set interest rate.
This is basically a system where fund managers pool money from investors and invest in financial securities for a profit. Mutual funds are managed by a fund manager rather than in an open market and are considered liquid since you can sell off your shares at any time.
Money market funds
This is a subset of mutual funds that focuses on investing in low-risk and low-yielding investments. A good example of this kind of investment is municipal bonds.
Frequently asked questions about liquid investment, liquid asset, and illiquid investment
Here are some of the frequently asked questions and their respective answers:
What is the biggest problem with liquid investments?
Basically, the biggest issue with having a portfolio with mostly liquid investments is that its value can collapse drastically in no time. For example, you can have several stocks in your portfolio drop drastically in value after something as little as a company announcement.
How do liquid assets differ from illiquid assets, discuss with examples?
The core difference between liquid and illiquid assets is that liquid assets can be easily converted into cash without a drastic loss in value. On the other hand, illiquid assets are mostly difficult to convert into cash within a short time. For example, you can easily sell your stocks in a matter of minutes and get their equivalent value or more. However, this is not possible with illiquid assets like a land or home.
What you should know
Through liquid investments, you can make investments that allow you to get your money back as quickly as the same day. Liquid investments are however short term, and many are not as beneficial as long-term or maybe some are. It all depends on the peculiarity of the situation.
What are liquid investments?
Liquid investment means investing in assets that you can convert to money (in cash) easily, without a huge drop in value. You can trade such assets for money and have a value that remains the same whether as cash or an asset.
The best example of liquid investments is money market funds (stock and bonds), cash, and shares of public companies that are actively trading on the stock exchange market.
Liquid investments must have the following characteristics:
- It must have a large number of interested buyers.
- There must be an established market.
- Transfer of ownership must be a simple process.
When is an asset not a liquid investment?
Assets or investments that take a long amount of time to be converted to cash, cannot be a liquid investment. They call them illiquid or non-liquid investments.
Also, if a conversion to cash causes a drastic drop in their original value (cost as an asset), then such investment is not liquid.
We cannot say real estate for example to be liquid, because it takes a while to convert to cash. There might also not be ready buyers, and should you choose to sell your asset, it results in a significant drop in its price.
Another example of illiquid assets
Real estate is a long term investment, and sometimes selling your asset might see you earn less than your original investment value, depending on the market. Another good example of illiquid investment is a hedge fund due to the regulations that may surround you selling it.
Keep in mind that some liquid investments could also become illiquid investments under duress. This could happen if the stock market freezes, and they allow no trades (like the attack on Sep 11th, 2001 that lead to close of NYSE for that day).
List of liquid investments to make
- Cash on hand: this is the most liquid type of asset to have because no selling needs to occur. Cash can settle liabilities anytime.
- Bonds: they can easily sell bonds with little or no change to their market value. They are highly liquid, and also one of the best liquid investments to make.
- Stocks: selling your stock asset is now as easy as running the transaction on your mobile phone. You can sell stocks for the same price you purchased them or more than their value, although you can lose money too by trading. Stocks fluctuate a lot and is probably not the best place to invest if there is a possibility of pulling out for an emergency.
- Checking account: although checking accounts have relatively low rates compared to saving accounts, it is another good liquid investment to make in a short term. Checking accounts are special bank accounts that allow unlimited deposits and numerous withdrawals.
- Certificate of Deposits (CDs): certificate of deposits allows you to invest your money in the bank while promising not to withdraw it for a particular amount of time. In exchange for this, you get higher regular interest rates, and at maturity, you can withdraw your capital along with its interest. Although not highly liquid due to withdrawal limitations, certificate of deposits remains a good liquid investment.
- Money market accounts: this account works like CDs. The bank pays you higher interest rates than regular accounts, although there are restrictions on how much withdrawals you can make per month. Money market accounts are highly liquid.
- High yielding savings account: opening a savings account is an excellent way to earn interest on your investment. The financial institution pays you a certain amount for depositing money into your account.
- Mutual funds: mutual funds are like an investment pool where you put in money, which you invest in low risk and low yielding financial assets. These assets are highly liquid (e.g. bonds and stocks).
- Exchange-Traded Funds (ETFs): exchange-traded funds are like mutual funds but more liquid. This is because unlike mutual funds, you can trade your investments during market hours.
Advantages of Liquid Investment
- You can exchange easily for cash to meet emergency needs.
- Liquid investments assume the value of cash, therefore you can buy new investments without being sold off first.
- Liquid investments carry lower risk than illiquid ones during market fluctuations. This is because you can sell them off easily compared to non-liquid assets.
- They offer you a stronger financial profile such that you would have a higher success chance while applying for loans.
Disadvantages of liquid investments
- Liquid investment assets are prone to price fluctuations and can in turn affect your financial worth. For example, stocks dropping by 30 percent would mean you now have 30% less cash than invested. Fixed assets are not prone to such fluctuations.
- Liquid assets are worth what they are worth, no negotiations, therefore there is no chance of selling it for a higher price like non-liquid assets.
Liquid investments are the best when you like your money to stay close, but still want returns like an investment. Also, they can convert to cash in time of market uncertainties.
All these qualities make liquid assets the best for short-term investment. However, remember to stay away from exorbitant fee withdrawal and risky investments.