I’ve been getting into finance, stonks and crypto lately and I love researching and learning. But one word I’ve never fully understood is “liquidity”.
What is it?
Does it mean cash?
Does it mean a bunch of stocks?
Is it a noun, an adjective?
What does it mean to provide liquidity?
What does it mean to liquidate?
What does it mean to be solvent/insolvent?
I’ve looked on many different articles and sources and I still can’t find a way of thinking about it that makes sense in all uses of the word
In: 7
Liquidity is cash or bank balance. Stocks are not liquid assets, neither is property, although both contribute to net worth. Liquidation sales are a good example of this. The company (usually one that has gone out of business) is trying to convert their material assets to liquid assets, or property in the form of products to money they can use for other purposes
Liquidity is cash, or assets that can quickly be converted into cash. Owning $15m worth of real estate won’t do a firm a lick of good if they don’t have the cash flow to maintain their buildings or meet payroll. Having liquidity means you can be more agile and have flexibility to adapt to changing conditions.
Liquidity is how quickly an asset you possess can be turned into cash for immediate use. Cash is obviously the most liquid since you can transfer and spend funds in a bank account immediately.
Stocks are considered good liquidity because you can sell stocks and have the cash in your account in 3 days.
What about your house? It isn’t very liquid since you have to put it on the market snd that can take a while. So if you need money quickly, this won’t help you…assuming you want full value of it and not giving it at a discount.
Liquidate is to completely turn an asset into cash.
You own 10 shares of a company? You sell 10 shares? You’ve liquidated. Sell a car? You liquidated your car.
You sell the house? Liquidated that asset as you no longer have it, and instead have cash.
Also, how liquid something is relative to how quickly you need the cash. Let’s say you own a Rolex worth 15k. You could try and sell it for 15k but that will take some time. If you’re in a hurry you could sell it for 100 dollars and someone will buy it instantly. Selling the house for a million? Takes time. Sell for 100,000..quick but not full market value.
Liquidity is a term used to define the portion of your net worth that is readily available to be used. Cash is a perfect example of liquidity. But property is not liquid (or illiquid) because it takes a really long time to sell.
The “liquidity” of something is how rapidly you can turn that valuable object into cash to be used for whatever. Obviously if you want to buy a house you can’t just trade your exotic car for it. You need to sell the car and turn it into cash which you can use to buy the house. Some things are easier or harder to turn into cash. How easy or hard it is makes it more or less “liquid”.
Likewise a “liquidation sale” is when you sell everything you own to turn it all into cash to pay your debts.
Liquidity is how easily something can be converted to cash. Obviously cash itself is most liquid, then things like stock that can be easily sold almost instantly. Shares in a private/pre-IPO company, real estate are some examples of less liquid assets because it’s harder to convert them to cash. It can also apply to a business’ ability to keep enough cash on hand to cover expenses. While businesses might have assets like machinery, inventory, real estate, patents, accounts receivable, if they don’t have money in the bank or credit lines they can tap into to pay vendors and make payroll, they’ll go under fast. Not being able to pay your bills and expenses is being insolvent.
All the posts here mention cash. That’s an old school way of thinking. Being liquid means being able to convert it into goods and services. Cash is liquid, but in some circumstances Venmo is more liquid (like during covid when people didn’t want your dirty money).
No matter what the asset, the easier and more readily it can be spent, the more liquid it is
To liquidate is to make assets more liquid (usually to satisfy debts). Being solvent means you have enough liquid (i.e.: you can buy the things you need) while being insolvent means you can’t. (You may have assets, bit there is not enough liquid to *dissolve* them).
It measures or describes how easy it is to turn something into cash. A house is an illiquid asset, for example, because it takes a lot of effort and time to sell the property and get cash for it.
Stocks are generally very liquid assets because you can sell them nearly instantly with the push of a button. You can compare the liquidity of different stocks and options and other financial instruments. Stocks with very low volume may not be as liquid as stocks with a lot of volume.
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