Liquidity definition

What is liquidity?

Liquidity is a word used to describe how easy it is to convert an asset into cash, or how easy an asset is to buy with cash. It’s not usually something to worry about when talking about long-term investing, but it is something to be aware of nonetheless.

Most of the assets that everyday investors buy and sell have a good level of liquidity. Things like stocks for example are liquid assets – there’s always a demand for them. But some investments are more niche, and it can be slightly harder to find a buyer for them when an investor wants to sell their investment, converting it to cash in the process.

Luxury goods, artwork, and property are all examples of assets with lower liquidity than say, stocks. That’s because they have a higher cost to participate. As an example, you need more money to be able to buy property than you do to buy stocks, so there are fewer buyers in the market – which could mean it takes you longer to sell. This is known as ‘liquidity risk’.

In that time, the market value might go up – which is a benefit, but it also further reduces the pool of potential buyers who have enough money to be able to buy your property. Equally, the price might go down in the time it takes you to sell, so you might have to accept a lower offer than you otherwise might have.

All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest.