Investment Liquidity: What Is It and Why Is It Important

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 StockLoan 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.