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Glossary

Liquidity Definition


Liquidity can easily be translated into the amount of time and cost it will take to turn investments or assets into cash. A liquid investment can be directly related to retirement funds or a child’s college funds. It is very possible for your investments to become too liquid or not liquid enough causing the end result to produce little to no return. Improper liquidity, or investing in short-term investments for long-term goals, can lead to insufficient funds when you thought the turnout would be the opposite. Therefore, liquidity is the leading cause of financial problems compared to other financial options.

Understanding liquidity is the first step toward determining investment liquidity. The easiest way to find liquidity in your investment is through determination. How long will it take for the funds to be easily accessible and in your pocket? For example, a retirement fund is not very liquid, especially at the beginning of the fund’s generation, because accessing it takes years and paperwork and won’t be in your pocket within a few days or hours. Investing in stocks, however, is very liquid because although you can’t sell your stocks over the weekend, you can easily hire a broker to quickly return your investments during business days.

Type of Liquid Investments

Savings Accounts

Savings accounts are one of the most liquid investments you can make today. They offer the same amount of liquidity as a checking account, giving you access to the funds 24/7. It is a very traditional investment form and offer high interest rates giving you sufficient funds as time passes.

Stocks and Bonds

Stocks and bonds can be seen from both sides, having little liquidity to having massive liquidity. This is because the sole purpose of stocks and bonds are to be untouched as revenue increases, giving it little liquidity. You can, however, easily access the funds in your investments by hiring a broker, giving it much liquidity. This generally isn’t always a good idea, because stocks and bonds tend to take at least a year to return your original investments.

Money Markets

Money markets are known for their versatility and, therefore, high liquidity. Investing in money markets can be compared to investing money into a savings account. However, money markets offer a higher return rate without impacting the liability of profits. They are both safe and dependable, as well as  very accessible.

Annuities

Annuities are great for retirement funds, because they allow for a steady and stable income on a fixed and set schedule. However, they are known for their lack of liquidity. This is because investments are only accessible on a quarterly to annually basis. Removing the original investment amount is nearly impossible, giving it an extreme lack of liquidity. The ability of an annuity changing rapidly depends on whether your investment is with a money market and/or stock.

Crowdfunding

Investing in crowdfunding is a low-liquidity opportunity. It offers great returns via yielded investments, but funds are not accessible until your returns are made clear. You are investing in someone that has the power to double or even triple your initial investment, and the lack of liquidity makes this possible. In the end, your return rates are much higher than your investment rates.

How to Easily Determine Investment Liquidity

It’s pretty simple at this point. Simply determine the amount of time it will take to access your investment and/or funds. If it is easily accessible, then the investment and account is liquid. If the investments or accounts take months, even years to access, then they are not at all liquid. Liquidity is not always a good thing. For example, with crowdfunding or stocks and bonds, it is necessary to leave your investments untouched to increase your profits.