What does 'Liquidate' mean

Liquidate means to convert assets into cash or cash equivalents by selling them on the open market. Liquidate is also a term used in bankruptcy procedures in which an entity chooses or is forced by a legal judgment or contract to turn assets into a "liquid" form (cash). In finance, an asset is an item that has value.

BREAKING DOWN 'Liquidate'

In the investments arena, liquidation occurs when an investor decides to close out his or her position on a particular asset or security. An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash. Liquidating an asset is carried out when an investor or portfolio manager needs the cash to re-allocate funds or re-balance the portfolio. An asset that is not performing well in the markets may also be partially or fully liquidated to minimize or avoid losses. An investor who needs cash to fulfill other non-investment obligations, such as bill payments, vacation expenses, car purchase, tuition fees, etc. may opt to liquidate his assets.

Financial advisors tasked with allocating assets to a portfolio usually consider, among other factors, why the investor wants to invest a certain amount of money and for how long s/he would like to invest for. A portfolio comprised of stocks and bonds for an investor whose objective is to purchase a home five years from now, may have these securities liquidated in five years. The cash proceeds would then be used to make a down payment for a home.

An individual may also decide to liquidate assets, such as house and land for cash. The cash could then be used to boost his or retirement nest egg or pay off creditors.

While businesses can liquidate assets to free up cash even in the absence of financial hardship, asset liquidation in the business world is mostly done as part of a bankruptcy procedure. When a company fails to repay its creditors due to financial hardship and prolonged losses in its operations, a bankruptcy court may order a compulsory liquidation of the business assets if the company is found to be insolvent. The secured creditors would take over the assets that were pledged as collateral before the loan was approved. The unsecured creditors would be paid off with the cash from liquidation, and if any funds are left after settling all creditors, the shareholders will be paid according to the proportion of shares each holds with the insolvent company.

As said earlier, not all liquidation is as a result of insolvency. A company may also undergo a voluntary liquidation, which occurs when shareholders of the company elect to wind down the company. The petition for voluntary liquidation is filed by shareholders when it is believed that the company has achieved its goals and purpose. The shareholders appoint a liquidator who dissolves the company by collecting the assets of the solvent company, liquidating the assets, and distributing the proceeds to employees who are owed wages and to creditors in order of priority. Any cash that remains is then distributed to preferred shareholders, if any, before common shareholders get a cut.

RELATED TERMS
  1. Liquid Asset

    A liquid asset is an asset that can be converted into cash quickly ...
  2. Core Liquidity

    Cash liquidity is the cash and other financial assets that banks ...
  3. Liquidator

    A liquidator is a person or entity that liquidates something, ...
  4. Liquidity Risk

    Liquidity risk refers to the marketability of an investment and ...
  5. Flight To Liquidity

    Flight to liquidity signifies a mass movement by investors toward ...
  6. Broad Liquidity

    Broad liquidity is a category of the money supply which includes: ...
Related Articles
  1. Investing

    Understanding financial liquidity

    Financial liquidity comes into play for companies, your personal finances, investing, and the financial markets. However, assets and investments have varying liquidity levels.
  2. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  3. Investing

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  4. Investing

    Stock Investors’ One Big Risk in a Market Crash

    The market correction earlier this year stands as a warning sign to investors that liquidity is waning.
  5. Investing

    3 Reasons Cash Is a Smart Position in Your Portfolio

    Explore three reasons to hold cash positions in investment portfolios, including the advantages of liquidity in falling markets and safe haven solutions.
  6. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  7. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  8. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
RELATED FAQS
  1. What are liquid assets, and why are they beneficial to a business?

    Learn the difference between liquid and fixed assets, and how a company's liquidity affects its financial health. Read Answer >>
  2. What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity ... Read Answer >>
  3. Is there a downside to having a high liquidity ratio?

    Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find ... Read Answer >>
  4. Which Creditors Are Paid First in a Liquidation?

    Find out the order in which creditors are paid during a corporate liquidation. Learn how bankruptcy claims by bondholders ... Read Answer >>
Trading Center