Are Stocks Liquid Assets?

The post Are Stocks Liquid Assets? by Sam Boughedda, Stock Market Analyst appeared first on Benzinga. Visit Benzinga to get more great content like this.

Liquid assets can take on various forms, and in many circumstances, a liquid asset depends on the current market situation. For example, an investor could own various assets that are difficult to liquidate. The investor will then have less cash to invest in new opportunities and may take a while to realize profits.

Liquidity is even more vital for businesses that need to pay short-term liabilities or overcome difficult economic periods. As an investor, it is essential to understand whether an asset is liquid or not.

What Are Liquid Assets?

A liquid asset can be efficiently transformed into cash in a short space of time while keeping its market value. 

A house is a type of non-liquid asset. If you had an enormous debt to pay off and needed cash quickly, you could not convert your home immediately into cash. Anything that is easily convertible into cash is considered a liquid asset. Having liquid assets is essential for the ability to stay financially solvent. 

Are Stocks Liquid Assets?

Stocks are liquid assets and can be converted into cash in a short period of time. This definition primarily refers to stocks that are listed on an electronic exchange. 

When buying or selling stocks, usually a steady number of market participants are ready to sell to or buy from you (depending on the stock). If you sell your stocks, you generally receive the cash in your account from your broker a few days later.

While stocks are considered liquid assets, it is crucial to understand that some are not as liquid as others, and some are even regarded as illiquid. Illiquid stocks cannot be readily sold because they see limited trading throughout the day. It means that buyers for these shares can be difficult to come by, and they cannot easily be converted to cash.

While stocks are liquid assets, they are slightly less liquid than cash, and you may have to sell below their value if the market is down at that given time.

What if I Invest in Mutual Funds or a 401(k)?

All mutual funds are liquid assets since investors can sell their shares and receive the cash within a few days. 

While mutual funds are liquid, they are less liquid than stocks or ETFs, which can be converted to cash within seconds. With a mutual fund, you usually experience a delay of a few days to receive the money after you have sold shares in a mutual fund. 

A 401(k) only becomes a truly liquid asset once you are at the age of retirement. If you withdraw from your 401(k) before the age of 59½, you are liable to pay a penalty. 

Money markets are a type of mutual fund that invests in liquid short-term securities, including Treasury bills with a short-term maturity and cash and cash equivalent securities. Money market funds are highly liquid due to the short-term nature of the investments and the fact that you can get your money out reasonably quickly. 

Some Stocks Do not Qualify as Liquid Assets

Some stocks are considered illiquid due to their extremely low daily trading volume. The difficulty in finding a buyer can mean that the stock is not a liquid asset. 

Much like that old car that you love and has been with you for years, you may value it highly, but others do not, and very few, if any, buyers will take it off your hands. It is the same as an illiquid stock. You may buy shares in a company you value highly, but if nobody else is interested, you won’t be able to convert it to cash quickly; therefore, that stock is considered illiquid. 

You can find many examples of people buying stocks they think will pump, only to realize they cannot sell the stock soon after. The same is true of cryptocurrencies, with many people buying unknown coins hoping they will rise quickly. However, a lack of liquidity can prevent investors from realizing their gains. 

Liquid Real Estate Investments

Real estate itself is not a liquid asset. Selling a property can take a lot of time and paperwork. It usually takes at least a couple of months to sell a property. 

In addition, investing in a property usually requires a lot of money and a long-term plan. 

However, you can invest in other ways in the property market by purchasing liquid assets. For example, a real estate investment trust (REIT) is a company that invests in the property market. You can buy shares in one of these trusts if you want a liquid investment. Here are the best REITs to buy this month. 

Another way to make liquid property investments is via an exchange-traded fund (ETF), a tradeable basket of stock. Check out Benzinga’s guide to REIT ETFs.

Other Types of Liquid Investments

It’s not just stocks, cash, mutual funds and ETFs that are liquid assets. Other liquid assets include treasuries, bonds, savings accounts and money market accounts. 

Treasuries are regarded as a safe investment as they have the backing of the U.S. Government. In addition, they have a fixed interest rate and value. Usually, treasuries have long-term maturity dates. However, you can sell the bond on the secondary market after 45 days, making it a liquid asset. 

Bonds are also liquid and can have maturities as short as one day. They can also be bought and sold on the secondary market, meaning they can be easily converted to cash. 

Your bank account is a liquid asset with readily available cash. However, some savings accounts require you to keep the money locked into the account for a specified period (sometimes years). You will be charged if you try to withdraw before then, so they cannot be considered a liquid asset. 

Money market accounts usually pay a higher interest. While they have some additional restrictions, they are considered liquid as the money is easily withdrawable. 

Benzinga’s Best Online Stock Brokers

Investing in a liquid asset like a stock requires a broker. Unfortunately, it can be difficult to know which broker is best for you as there are hundreds, if not thousands, to choose from. Luckily, Benzinga has done the work for you. Take a look at the best online brokers below.

Building a Portfolio with Liquid Assets

As you can see, many types of liquid assets exist, with stocks being one of them. A key takeaway when investing is to be careful if you want to invest in a little-known stock, as its trading volume could mean you are unable to sell when you intend to and could end up losing money. Certain types of savings accounts may also require you to lock your money in the account for a certain period. 

The best stocks to buy are usually the most liquid, but as always, make sure to research the company as much as possible.

Frequently Asked Questions

The post Are Stocks Liquid Assets? by Sam Boughedda, Stock Market Analyst appeared first on Benzinga. Visit Benzinga to get more great content like this.