What is Liquid Asset? Definition of Liquid Asset, Liquid Asset Meaning
A liquid asset is an asset that, when it comes time for sale, can be quickly converted into cash without losing its value.
Therefore, an asset will be more liquid the faster it can be converted into money or cash. And therefore, the so-called illiquid or illiquid assets are those that would take longer to sell and / or when doing so implies a loss or reduction in value.
The liquid asset par excellence would be cash, that is, bills and coins. While the typical example of an illiquid asset would be real estate, because it cannot be sold overnight.
Characteristics of a liquid asset
There are a number of characteristics that help us to recognize a liquid asset compared to another that is not. Let's see some below:
- Conversion speed : It will be an asset that can be converted into cash in a short period of time.
- Existence of liquid markets : Generally an asset will be more liquid the more people are willing to buy or sell it. Therefore, the deeper or broader the market where the asset is traded, the more liquid it will be.
The simplest example is to compare the shares of a company that is listed on the financial markets, with another company whose shares are not traded on them. The shares that are listed on the stock exchange will logically be a more liquid asset than those that are not traded on it. Since there are many investors who could buy and sell these shares.
- It belongs to the current assets of a company : Companies usually order the asset within their balance sheet based on its liquidity. Where the most liquid assets will be within current or current assets. While the less liquid assets will be classified within non-current assets or fixed assets. Therefore, it would be enough for us to see the balance sheet of any company, to know which assets within the company would be the most liquid.
It should be noted that the time difference between being a current or non-current asset is usually stipulated in one year. In other words, that asset that can be converted into liquidity or cash in a period of less than one year is classified as current or current assets.
Examples of liquid assets
In this section we are simply going to see examples of the most liquid assets from the perspective of a company, and all of them being ordered from highest to lowest liquidity. In addition, as mentioned above, all of them could be found within the company's financial balance sheet, classified in the part of current or current assets:
- Shares listed on the stock market and financial markets.
- Fixed income assets that are negotiable and are listed on the financial markets.
- Investment funds.
- Term deposits.
- Accounts receivable from customers.
- Inventories of a company.