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Liquid assets are those that can be readily converted to cash without losing value. These take many forms, including cash, stocks, other tradable instruments, money market funds, and more. Liquid assets differ from their illiquid or fixed equivalents. These are investments that take significantly longer to convert to cash, usually due to a shortage of purchasers. A financial advisor can help you decide how much of your assets should be liquid.

Not all liquid assets share the same degree of liquidity. Naturally, the most liquid asset is cash on hand because you can readily use it without going through any transaction or conversion.

Some factors that determine the liquidity of assets are mentioned below:

  • How long it takes for the assets to be liquidated (converted into cash): Most liquid assets are the ones that take little to no time to convert into cash.
  • How established is the liquid market: A liquid market has readily available buyers and sellers and low transaction costs.
  • How easy is it to transfer ownership: The easier it is to transfer ownership of an asset, the quicker you’ll receive your cash.

Liquid assets are often viewed as cash, and likewise may be called cash equivalents because the owner is confident the assets can easily be exchanged for cash at any time.

Generally, several factors must exist for a liquid asset to be considered liquid. It must be in an established, liquid market with a large number of readily available buyers. Ownership transfer must also be secure and easily facilitated. In some cases, the amount of time to cash conversion will vary.

The most liquid assets are cash and securities that can immediately be transacted for cash. Companies can also look to assets with a cash conversion expectation of one year or less as liquid. Collectively, these assets are known as a company’s current assets. This broadens the scope of liquid assets to include accounts receivable and inventory.

In financial accounting, the balance sheet breaks assets down by current and long-term with a hierarchical method in accordance to liquidity. A company’s current assets are assets a company looks to for cash conversion within a one-year period. Current assets have different liquidity conversion timeframes depending on the type of asset. Cash on hand is considered the most liquid type of liquid asset since it is cash itself.

Cash is legal tender that an individual or company can use to make payments on liability obligations. Cash equivalents and marketable securities follow cash as investments that can be transacted for cash within a very short period, often immediately in the open market. Other current assets can also include accounts receivable and inventory.

On the balance sheet, assets become less liquid by their hierarchy. As such, the long-term assets portion of the balance sheet includes non-liquid assets. These assets are expected for cash conversion in one year or more. Land, real estate investments, equipment, and machinery are considered types of non-liquid assets because they take time to convert to cash, costs can be incurred to convert them to cash, and they may not convert to cash at all.

Top 5 Liquid Assets

Examples of liquid assets held by both individuals and businesses include:

1. Cash and Cash Equivalents

Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances. It also includes cash from foreign countries, though some foreign currency may be difficult to convert to a more local currency.

Cash equivalents are another asset holding that may be treated similarly as cash due to their low risk (or insurance coverage) and short-term duration. Examples of cash equivalents include Treasury bills, Treasury notes, commercial paper, certificates of deposit (CD), or money market funds. Note that some items may have less liquidity based on the terms of the vehicle. For example, some CDs can not be broken or require a substantial penalty for early termination.

2. Marketable Securities

Some marketable securities are considered liquid based on the underlying asset. Examples may include stocks, bonds, preferred shares of stock, index funds, or ETFs. Other instruments may include futures or options.

A critical part in understanding the liquidity of marketable securities is their holding duration. Liquid assets must be convertible to cash quickly; depending on the nature of the security, this isn’t always possible. Also, be mindful that certain investments must be reported on the balance sheet as long-term assets and are not technically considered current assets.

3. Accounts Receivable

Accounts receivable are a controversial type of liquid asset. On one hand, a company has a legal claim to cash that is due to them often as part of their business operations. A customer may have bought something on credit; after the credit term is up, the company is due to receive cash.

Read Also: Understanding Liquid Assets: What They Are and Why They Matter

On the other hand, accounts receivable balances may go uncollected. It may also take an unforeseeably long amount of time to collect payment from a delinquent client. When considering liquid assets, be aware that a company may not collect all of its accounts receivable balance. For this reason, liquid asset analysis may include the contra asset allowable for doubtful accounts balance to reduce accounts receivable to only what the company thinks they will collect.

4. Inventory

Another difficult current asset to assess is inventory. In some situations, inventory may be considered a liquid asset if it has a large market with highly visible marketplaces for a product in high demand. Consider the latest iPhone; any models being recorded as inventory may quickly be demanded by the market.

Alternatively, what if demand for the iPhone sours? What if a new model comes out, and Apple is stuck with obsolescent inventory? What if primary warehouses are broken into and most of the inventory is stolen? In theory, inventory is a liquid asset because it gets converted to cash as part of normal business operations. However, should business slow in a recession or any event above occurs, inventory may not be as liquid.

5. Emergency Fund

Your emergency fund could be any asset you can easily access during an emergency. Usually, it’s a stash of cash that people keep close by to use in times of financial distress or a country-wide crisis. Emergency funds save you from having to draw from high-interest debt options like credit cards – some of which may not even be accessible in certain turbulent times.

Building your liquid assets essentially means that you’re giving yourself a financial insurance plan. In the case of an emergency, you’ll have money on hand to cover yourself and/or your loved ones through any major or unexpected incidents.

Take a look at your assets and rank them in order of liquidity. If you don’t have any cash to cover an emergency, start with that: an emergency fund. Add to this as much as you possibly can. A comfortable amount would cover your basic needs and expenses for three to six months if you lost your job. And that amount, of course, is not the same for everyone. It varies based on factors such as your specific monthly expenses, family and your living situation.

An emergency fund may be the easiest way to start building liquid assets, but there are other ways, too. You can try a hands-off robo-advisor or use a variety of tools, like mobile banking apps to investment apps – that don’t require more than a couple of dollars to try. You can also use a budgeting calculator to do some short-term planning and an investment calculator to get a sense of how your assets could grow over time.

Analyzing Liquid Assets

In business, liquid assets are important to manage for both internal performance and external reporting. A company with more liquid assets has a greater capability of paying debt obligations as they become due.

Companies have strategic processes for managing the amount of cash on their balance sheet available to pay bills and manage required expenditures. Industries like banking have a required amount of cash and cash equivalents that the company must hold to comply with industry regulations.

There are several key ratios analysts use to analyze liquidity, often called solvency ratios. Two of the most common are the quick ratio and the current ratio. In the current ratio, current assets are used to assess a company’s ability to cover its current liabilities with all of its current assets and to survive unplanned and special circumstances like a pandemic.

The quick ratio is a more stringent solvency ratio that looks at a company’s ability to cover its current liabilities with just its most liquid assets. The quick ratio does include accounts receivable.

Liquid and Non-Liquid Markets

Individuals and corporations interact with both liquid and non-liquid markets. Cash is the ultimate goal for liquidity, and the ease of conversion to cash generally distinguishes a liquid from a non-liquid market, although there may be other factors to consider.

A liquid asset must have a well-established market with enough buyers and sellers to facilitate conversion to cash. The asset’s market price should also not move dramatically, resulting in less liquidity or more illiquidity for following market players.

The stock market is an example of a liquid market because of its large number of buyers and sellers which results in easy conversion to cash. Because stocks can be sold using electronic markets for full market prices on demand, publicly listed equity securities are liquid assets. Liquidity can vary by security, however, based on market capitalization and average share volume transactions.

The foreign exchange market is deemed to be the most liquid market in the world because it hosts the exchange of trillions of dollars each day, 24 hours a day, making it impossible for any one individual to influence the exchange rate. Other liquid markets include commodities and secondary market debt.

Illiquid Markets

Illiquid markets have their own considerations and constraints. These factors can be important for individuals and investors when allocating for liquid vs. non-liquid assets and making investment decisions.

For example, a real estate owner may wish to sell a property to pay off debt obligations. Real estate liquidity can vary depending on the property and market but it is not a liquid market like stocks. As such, the property owner may need to accept a lower price in order to sell the property quickly. A quick sale can have some negative effects on the market liquidity overall and will not always generate the full market value expected.

Another type of controversial illiquid asset may include private market fixed income which can be liquidated or traded but less actively. Overall, in considering illiquid assets, investors usually apply some type of liquidity premium which requires a higher yield and return for the risk of liquidity.

Requirements on the Value of Liquid Assets

Some companies or entities may face requirements on the value of liquid assets. This restriction is to ensure the short-term health of the company and protection of its clients.

The U.S. Department of Housing and Urban Development has outlined liquid asset requirements for financial institutions to become FHA-approved lenders. For example, non-supervised mortgagees must possess a minimum of $200,000 of liquid assets at all times.

The Federal Deposit Insurance Corporation (FDIC) stipulates the level of unencumbered liquid assets lending institutions must have on hand. It also outlines policies when institutions are required to have more liquid assets are required, such as (1) recent trends show substantial reductions in large liability accounts, (2) the loan portfolio includes a high volume of non-marketable loans, or (3) the institution’s access to capital markets is impaired.

Last, the Securities and Exchange Commission (SEC) has proposed amendments to money market funds. Rule 2a-7 outlines requirements after the acquisition of an asset where a money market fund must hold at least 10% of its total assets in daily liquid assets and 30% of its total assets in weekly liquid assets. New proposals are being considered to increase both daily and weekly liquid asset thresholds.

Best Investments to Know About for Investors

As an investor, you have numerous alternatives for where to place your money. It is critical to carefully consider the many investing options available. Investments are often divided into three categories: stocks, bonds, and cash equivalents. There are numerous types of investments in each class.

Here are six types of investments to consider for long-term growth, along with information about each. We will not discuss cash equivalents, such as money markets, certificates of deposit, or savings accounts, because such forms of investment accounts are more concerned with protecting your money than with expanding it.


A stock is an investment in a specific company. When you purchase a stock, you’re buying a share — a small piece — of that company’s earnings and assets. Companies sell shares of stock in their businesses to raise cash; investors can then buy and sell those shares among themselves. Stocks sometimes earn high returns but also come with more risk than other investments. Companies can lose value or go out of business.

How investors make money: Stock investors make money when the value of the stock they own goes up and they’re able to sell that stock for a profit. Some stocks also pay dividends, which are regular distributions of a company’s earnings to investors.


A bond is a loan you make to a company or government. When you purchase a bond, you’re allowing the bond issuer to borrow your money and pay you back with interest.

Bonds are generally considered less risky than stocks, but they also may offer lower returns. The primary risk, as with any loan, is that the issuer could default. U.S. government bonds are backed by the “full faith and credit” of the United States, which effectively eliminates that risk. State and city government bonds are generally considered the next-less-risky option, followed by corporate bonds. Generally, the less risky the bond, the lower the interest rate.

How investors make money: Bonds are a fixed-income investment, because investors expect regular income payments. Interest is generally paid to investors in regular installments — typically once or twice a year — and the total principal is paid off at the bond’s maturity date.

Mutual funds

If the idea of picking and choosing individual bonds and stocks isn’t your bag, you’re not alone. In fact, there’s an investment designed just for people like you: the mutual fund.

Mutual funds allow investors to purchase a large number of investments in a single transaction. These funds pool money from many investors, then employ a professional manager to invest that money in stocks, bonds or other assets.

Mutual funds follow a set strategy — a fund might invest in a specific type of stocks or bonds, like international stocks or government bonds. Some funds invest in both stocks and bonds. How risky the mutual fund is will depend on the investments within the fund.

How investors make money: When a mutual fund earns money — for example, through stock dividends or bond interest — it distributes a proportion of that to investors. When investments in the fund go up in value, the value of the fund increases as well, which means you could sell it for a profit. Note that you’ll pay an annual fee, called an expense ratio, to invest in a mutual fund.

Index funds

An index fund is a type of mutual fund that passively tracks an index, rather than paying a manager to pick and choose investments. For example, an S&P 500 index fund will aim to mirror the performance of the S&P 500 by holding stock of the companies within that index.

The benefit of index funds is that they tend to cost less because they don’t have that active manager on the payroll. The risk associated with an index fund will depend on the investments within the fund.

How investors make money: Index funds may earn dividends or interest, which is distributed to investors. These funds may also go up in value when the benchmark indexes they track go up in value; investors can then sell their share in the fund for a profit. Index funds also charge expense ratios, but as noted above, these costs tend to be lower than mutual fund fees.


A brokerage account is required regardless of the type of investment you make. Unlike a bank account, a brokerage account allows you to purchase and sell securities.

You may open a brokerage account in as little as 15 minutes, and once it’s funded, you can start investing. The broker’s website will offer tools to help you identify the investments you’re looking for, as well as educational resources to get you started.

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