A liquid asset refers to cash or any other asset that can be easily converted to cash at or near its market value. Aside from cash, liquid assets include items like investments, as well as accounts receivable and inventory. Non-liquid assets include things such as real estate, machinery, and patents, since they can't be turned into cash quickly.
Definition of liquid assets
Simply put, a liquid asset is anything that can be readily converted to cash, without a major sacrifice to its market price. For example, if your home is worth $250,000, you may be able to sell it in a matter of hours if you put it on the market for $170,000. However, this would be a major discount to its market value, and therefore, your home is not a liquid asset.
On the other hand, if you own shares of a publicly traded stock, it can typically be sold in a matter of seconds, and at a price within a few cents of its market value.
Examples of liquid assets
As you could probably guess, cash is the most liquid type of asset, as it doesn't even need to be sold in order to be used, like other types of liquid assets. And for our purposes, money in your checking and savings accounts that you can readily withdraw are also considered to be cash assets.
Money in certificate of deposit (CD) accounts is slightly less liquid, as you may face a modest penalty for withdrawing the money before the maturity date. Investments such as stocks, bonds, and mutual funds are also considered to be liquid assets.
Stocks can be sold quite easily at a price within a few cents of their market value, and often with the simple click of a button. Bonds have varying degrees of liquidity, but can generally be sold fairly quickly without sacrificing too much of their market value. And mutual funds can be sold daily -- meaning that if you place a "sell" order, the position will be liquefied, or converted to cash in your account by the following day.
In the case of businesses, assets that can be easily converted into cash, or are expected to be converted into cash within one year, are considered to be liquid (although some of these assets are far more liquid than others). Accounts receivable are typically considered to be liquid assets, as they are expected to be collected within one year. The same can usually be said of inventory on hand that can be reasonably expected to be sold within a year. On a company's balance sheet, assets are listed in descending order of liquidity, with cash listed first.
To be clear, these aren't the only kinds of liquid assets, but are some of the most common examples.
Example of illiquid assets
In contrast to liquid assets, some assets are illiquid, meaning that they typically cannot be sold quickly at a reasonable market value.
In personal finance, assets like homes and land are illiquid, or non-liquid assets. It can take months, if not longer, to sell a home at a reasonable price. And if you need to sell real estate very quickly, it can result in a loss. Ownership in non-publicly traded businesses can be a rather non-liquid asset, as well. Also included in the illiquid asset category are collectibles such as artwork and rare coins.
In corporate finance, goodwill is an example of an illiquid asset, along with patents and copyrights. Brand names are good examples of illiquid assets that can have considerable value. As a specific example, Coca-Cola's brand name is valued at approximately $73 billion, according to Interbrand. However, that doesn't mean the company could sell the rights to its brand name for this amount quickly if it needed to raise cash.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at email@example.com. Thanks -- and Fool on!
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.