Most liquid to least liquid assets1/10/2024 The next article in this series will go over these in detail. Liquidity is measured using ratios such as cash ratio, current ratio, and more. Any cash left over can be used to pay dividends to shareholders and grow the firm. When assessing the health of a company, understanding the company's liquidity is important for gauging how able a firm is to pay its short term debts and current liabilities. These are most difficult to sell because of the high degree of complexity involved in the sale. The very least liquid assets (generally speaking) are businesses that the company owns. Examples of this are the real estate, machinery or tools, and raw materials. Plant, property, and equipment are even further down on the liquidity scale for the reasons mentioned in the introduction. a new trend for a particular artist) the liquidity could be reassessed. However, should demand for an item suddenly increase (e.g. Clearly this reduces the liquidity of this type of asset. However, if they need the cash quickly they will likely have to sell at a discounted price. Owners of these items could get the true value for the items if they shop around enough for the right buyer. The Least Liquid AssetsĬollectable items such as coins, stamps, and art are fairly illiquid (opposite of liquid). This makes them slower to convert into cash and hence less liquid. This includes restricted or preferred shares which often have restrictions or terms upon which they can be sold. Investment assets are next on the liquidity scale. In practice what this means is that the bid-offer-spread (the difference between the bid price and ask price) is low. This is because higher trade volume indicates that the asset is easily traded for the market price. The higher the trade volume is for a stock or bond, the more liquid it is. Stocks and bonds are the non-cash assets which can also be most easily converted into cash. What is the Liquidity of Different Assets? The Most Liquid AssetsĪs we mentioned before, cash is the most liquid asset you can own. The next section breaks down types of assets and their liquidity further. Imagine you’re a minerals company and have a digger worth $5 million, you couldn’t just sell it tomorrow if you needed that money to pay off an outstanding debt. An example would be large assets such as plant, property, and equipment. In comparison, an asset with lower liquidity would be something less simple to convert cash. It’s obvious then that cash is the most liquid asset you can have, particularly of a relatively stable currency like USD. Generally speaking, liquidity refers to how easily an asset can be converted into cash without affecting the market price. However, once you understand the core principles, learn how to calculate the ratios, and how to use ratios it becomes a lot less complicated. The industry is full of complicated sounding ratios and grandeur terms. The world of finance can feel like a black box. What is Liquidity and Why is Liquidity Important?
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