Liquid assets are those assets that can be converted to cash quickly while having the ability to retain its market value. These assets are termed as liquid as they have the ability to flow freely with ease like water. Liquidity is considered as a scale whereby an asset can be adjudged on whether it is highly liquid or not. Some assets that are considered to be liquid are –

• Cash in hand
• Cash in bank
• Cash equivalents
• Accrued income
• Government bonds
• Promissory notes
• Stocks
• Marketable securities
• Accounts receivable
• Certificates of deposit
• Tax refunds

For example, stock markets. The huge number of buyers and sellers in a market helps people with the opportunity of converting the stocks to cash when required, giving the asset a sense of its liquidity. When it comes to ‘cash in hand’, it is already at its most liquid state and any asset that stands close to it, in terms of liquidity, is ‘cash in bank’ due to the relative ease of accessing it. ‘Cash equivalents’ are investments that have short term maturity periods (90 days or less). Marketable securities, mutual funds, and treasuries are some other cash equivalents.

Most investments are considered to be liquid as they reap benefits at any given point of time. This is why mutual funds, money market funds, bonds, and stocks, are believed to be liquid. On the contrary, any asset consumes a significant amount of time converting into cash and has the propensity to lose some of its market value is not a liquid asset. Examples of these are jewelry, real estate, and automobiles.

Liquidity in assets is an essential characteristic for any asset owner to consider. In cases of financial emergencies, a person or an enterprise might need funds as soon as possible. As time passes, the situation becomes dire. At times like this, liquid assets can play a pivotal role, as it pays off liabilities quickly. Aside from saving time, it prevents the person from pledging assets that will decline in its market value. During a flight or fight situation, it is immaterial how wealthy a corporation or person is on paper, instead one must consider what pace can the funds be gathered to fight another day. The most feasible way is using a resource pool of liquid assets.

When someone applies for a loan or a mortgage, the lender, in all probability, will not only review your assets but also gauge their liquidity. This gives the lender the guarantee that if the borrower has any financial slump, he can gather some cash quickly to get over it. Liquid assets help in coping with any unforeseen events such as loss of employment or grave illness.

Liquidity is not a fixed concept that has a black or white demographic but rather a scale. Some assets are highly liquid, while some slightly or semi-liquid. Other assets are considered to be more rigid and inflexible.