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Investment Liquidity: What Is It and Why Is It Important

January 03, 20243 min read

With markets shifting and changing on a daily basis, liquid investments are now more relevant than ever.

Investors and market experts often focus on the importance of investment liquidity. But what is liquidity and how do experts use it to evaluate investments? In this article, we are examining the importance of investment liquidity.

What is Investment Liquidity?

Essentially, liquidity refers to the ability to turn any asset into cash. It's the ability to trade securities without affecting the price of an asset. In basic terms, investment liquidity refers to how easy or hard it is to buy and sell. The easier it is, the more liquidity it has.

Degrees of Liquidity

Cash is the most liquid asset. You can use it to buy anything, and everything is measured by its price in dollars.

Stocks are fairly liquid as well since they are already in the market and can be easily converted into cash when sold to other investors. Various debt instruments, stock loans, and equities are also fairly liquid.

One possible exception to that rule is company shares that are significantly expensive. An example is Warren Buffett's Berkshire Hathaway shares -- at $130,000 per share, they are not particularly easy to buy or sell.

Physical assets are often less liquid. For example, a vintage car or a real estate property might worth a lot, but they are hard to utilize or sell. Other less liquid assets might include private assets that can't be sold without a significant loss.

Why is Liquidity Important?

The 2008 financial crisis outlined the importance of liquidity. Simply put, investors who are able to sell an investment fast have an advantage over investors with less liquid assets. In times of financial instability, it's important to be able to sell quickly if needed.

Holding on to liquid assets has long-term benefits, but investors value the ability to be able to turn their assets into cash in times of need. For example, if a market is collapsing, those who can liquefy their assets faster minimize their losses.

Building a Balanced Portfolio

Most investors have a clear long-term plan for their investing activities. This often includes a secure retirement or the increase of generational wealth. However, short-term goals are equally as important since they directly affect investing choices.

When building a portfolio, investors should strive to strike a balance between having a portion of their assets in cash. The rest should be invested in a way that makes it possible to use in unexpected financial situations.

Leveraging Non-Marginable Securities for More Liquidity

Investors who own a significant amount of private or otherwise non-liquid stocks can obtain more investment liquidity through stock loans.

These work by temporarily transferring one's stocks to a stock loan company in exchange for a cash loan. The stocks are returned to the original owner after the loan has been repaid.

If you are seeking a reliable stock loan plan for your non-marginable securities, check out Stock Loan Solutions. With more than 58 years of combined experience, the firm funds stock loans from $50,000 to $5 million for stocks traded on all major U.S. exchanges.

David

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The information contained herein is presented solely for the purposes of discussion and under no circumstances should this be considered an offer to buy or a solicitation of an offer to sell any security. Stock Loan Solutions is not a registered securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Stock Loan Solutions, its managers or affiliates have not been registered and do not plan to be registered under the Investment Advisers Act of 1940 or any similar state or foreign securities laws. Stock Loan Solutions is not registered under the Investment Company Act of 1940 or under any similar state or international securities laws. Stock Loan Solutions does not offer any form of investment (buy or sell) advice, tax counseling, estate planning, or any other securities or financial advice whatsoever. No statements on this website or any verbal or written statement by any representative shall be construed as such advice. We are neither licensed nor qualified to provide investment advice.

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