What is a Liquid Investment?

A liquid investment is any investment that can be easily converted into cash without having a significant impact on its value. In addition, it must be a simple matter to transfer ownership in the asset to another party. The sum total of these investments can be aggregated and compared to a company’s short-term liabilities to see if there are sufficient liquid investments on hand to pay off the liabilities, which is a key indicator of corporate liquidity.

Examples of Liquid Investments

Here are several types of liquid investments:

Cash. This is the ultimate fungible asset, since it is a perfect store of value.
Money market funds. These funds can be converted into cash within one day, and have no risk of loss.
Shares that trade on an active exchange. These shares can be converted into cash within a short period of time, though there is a risk of loss in value, depending on changes in the market price.

In all cases, it is easy to transfer these assets to a third party, and there is a ready market for them.

Examples of Illiquid Investments

Investments are not considered to be liquid when it takes a significant amount of time to convert them into cash, or if the act of selling them reduces their value. For example, real estate can take a long time to sell, and so is not classified as a liquid investment. Or, the shares of a company that are thinly traded cannot be sold in bulk without causing a significant downward shift in their price, and so are also not considered to be liquid.