A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value. (For more, see "Understanding Financial Liquidity.")
Cash on hand is considered a liquid asset due to its ability to be readily accessed. Cash is legal tender that a company can use to settle its current liabilities. For example, the money in your checking account, savings account, or money market account, is considered liquid because it can be withdrawn easily to settle liabilities.
Cash equivalents are typically investments that have short-term maturities of less than 90 days and are considered liquid assets because they can be readily converted to cash. Examples of cash equivalents include:
- Stocks and marketable securities, which are considered liquid assets because these assets can be converted to cash in a relatively short period of time in the event of a financial emergency
- U.S. Treasuries and bonds
- Mutual funds, a managed portfolio of investments wherein money from various investors is pooled and invested in a variety of different financial securities including stocks and bonds (Rather than purchase shares of an individual stock, investors buy shares of a mutual fund. However, these transactions are executed by the fund manager or through a broker, rather than on an open market. Mutual funds are considered liquid since investors can sell their shares at any time and receive their money within days.)
- Money-market funds, a type of mutual fund that invests in low-risk low-yielding investments like municipal bonds (Similar to mutual funds, money market funds are also liquid investments.)
Non-liquid assets are assets that can be difficult to liquidate quickly. Land and real estate investments are considered non-liquid assets because it can take months for a person or company to receive cash from the sale.
For example, suppose a company owns real estate property and wants to liquidate because it has to pay off a debt obligation within a month. The process of selling the property may take longer than a month since it will take time to find an investor, negotiate and agree on a price, and to set up the closing for the sale. If the company wants to sell the property quickly, the property might sell for a lower price than its current market value, or it could sell for a loss to the owner. In this case, trying to liquidate a real estate investment can have a high impact on its value.
Generally, investments are considered liquid assets because they can be easily sold, depending on the type of investment. Liquid assets typically have a stable market price. Non-liquid assets cannot be quickly sold for cash. However, even though liquid assets are easily converted to cash, they can be negatively impacted by inflation. For a related article, please see "What Is the Impact of Inflation on Liquid Assets?