What are liquid assets?

Liquid assets, also known as cash equivalents, refer to assets that can be quickly converted into cash without significantly impacting their value. They are typically highly liquid and easily tradable in the market. Examples of liquid assets include cash, government bonds, stocks, and certain types of securities that can be held in an investment portfolio.

For individuals, liquid assets are crucial for financial security and flexibility. As they can be easily converted to cash, they provide a readily available source of funds to meet unexpected expenses, emergencies, or investment opportunities without the need to sell off other assets at a loss. A liquid asset can also serve as a cushion during periods of financial instability, offering peace of mind and stability and protecting against financial hardship.

For businesses, liquid assets are essential for maintaining liquidity and operational efficiency. They enable companies to cover short-term costs such as payroll, rent, short-term debt obligations and inventory purchases. Additionally, liquid assets play a vital role in facilitating daily business operations, funding growth initiatives, and seizing strategic opportunities. Without adequate liquidity, businesses may face cash flow problems, credit issues, and difficulties in meeting financial obligations, which could significantly impact their overall growth and function as a company.

Overall, understanding and managing liquid assets effectively are essential for both individuals and businesses to maintain financial stability, seize opportunities, and navigate economic uncertainties.

There are several kinds of investments across financial markets that are considered liquid assets, including the following:

• Cash: This is the most basic form of liquid asset. It includes physical currency (coins and banknotes) as well as funds held in checking and savings accounts that can be accessed immediately. Cash is readily available for transactions and emergencies.

• Money Market Funds: Money market funds are mutual funds that invest in short-term, low-risk securities such as Treasury bills, commercial paper, and certificates of deposit (CDs). They offer higher interest rates compared to traditional savings accounts while maintaining liquidity. Investors can typically access their funds quickly with minimal risk of loss.

• Treasury Bills (T-bills): T-bills are short-term debt securities issued by the US government with maturities ranging from a few days to one year. They are considered one of the safest investments because they are backed by the full faith and credit of the US government. T-bills are highly liquid and can be easily bought and sold in the secondary market.

• Certificates of Deposit (CDs): CDs are time deposits offered by banks and credit unions. They typically have fixed terms ranging from a few months to several years, during which the funds are inaccessible without penalty. However, CDs are still considered liquid assets because they can be sold in the secondary market, albeit with potential early withdrawal penalties.

• Marketable Securities: Marketable securities include stocks, bonds, and other financial instruments that can be easily bought or sold in the secondary market. While stocks are subject to market fluctuations and may not always be immediately liquid at a desired price, highly traded stocks with significant market capitalization are generally considered liquid assets. Bonds issued by reputable entities with active secondary markets also offer liquidity, although certain types of bonds may be less liquid than others.

These types of liquid assets provide individuals and businesses with flexibility, security, and easy access to funds when needed, making them essential components of a well-rounded financial portfolio.

Why is asset liquidity important?

Liquid assets play a crucial role in contributing to overall financial health and stability for both individuals and businesses in several ways:

• Emergency Funds: Liquid assets, such as cash and money market funds, serve as the foundation of an emergency fund. Having readily accessible funds allows individuals to cover unexpected expenses like medical emergencies, car repairs, or sudden job loss without resorting to high-interest debt or selling off long-term investments at a loss.

• Cash Flow Management: For businesses, maintaining sufficient levels of liquid assets can enhance a company's ability to ensure smooth cash flow operations. Having cash on hand allows businesses to cover day-to-day expenses, such as payroll, rent, utilities, and inventory purchases, without interruption. This helps prevent cash flow crises and allows businesses to operate efficiently even during challenging times.

• Financial Flexibility: Liquid assets provide individuals and businesses with financial flexibility and the purchasing power to capitalize on opportunities as they arise. Whether it's taking advantage of a discounted investment opportunity, seizing a strategic business opportunity, or making a large purchase, having liquid assets readily available enables quick decision-making without the need to liquidate other assets or rely on external financing.

• Debt Management: Liquid assets can also be used to manage debt effectively. Individuals can use cash reserves to pay down high-interest debt, reducing overall interest expenses and improving the financial position of their current liabilities. Similarly, businesses can use liquid assets to repay short-term loans or lines of credit, reducing interest costs and improving their creditworthiness.

• Buffer Against Market Volatility: During periods of market volatility or economic downturns, liquid assets provide a cushion against financial losses. Individuals can use cash reserves to cover living expenses and avoid selling investments at depressed prices. Similarly, businesses with ample liquid assets can weather economic uncertainties, continue operations, and even capitalize on distressed opportunities in the market.

Liquid assets contribute significantly to overall financial health and stability by providing liquidity, financial flexibility, and resilience against unexpected events. They form the foundation of sound financial planning for individuals and play a critical role in sustaining the operations and growth of businesses.

The difference between liquid and non-liquid assets

Liquid assets and illiquid assets differ in terms of their convertibility into cash and the ease with which they can be bought or sold on the market. Here's a breakdown of the key differences and the advantages of liquidity:

Liquid Assets:

• Convertibility: Cash equivalents can be quickly and easily converted into cash without significantly affecting their cash value.

• Marketability: Cash equivalents are actively traded in the market, meaning there is a high demand for them, and they can be bought or sold with minimal impact on their market price. Cash can be considered the most liquid asset, as it is already in the form of money.

• Liquid Assets Examples: Cash, savings accounts, checking accounts, money market accounts, mutual funds, treasury bonds and treasury notes, foreign currency, precious metals, highly traded stock market listed equities and other securities can be considered to be examples of cash equivalents.

Illiquid Assets:

• Convertibility: Illiquid assets cannot be easily converted into cash without potentially incurring significant costs or losses. They may require time and effort to sell, and their market value may be difficult to determine.

• Marketability: Illiquid assets have a limited market, meaning there may be fewer buyers or sellers, resulting in longer transaction times and potentially lower selling prices. Sellers looking to generate cash immediately may have to accept significant discounts below market value in order to do so.

• Non-Liquid Assets Examples: Real estate, certain types of bonds with low trading volumes, private equity investments, collectibles, and certain types of business assets are all considered to be non-liquid assets.

Market dynamics and liquid assets

How does a liquid asset behave in different market conditions and what is its role in investment portfolios?

Arguably, in a bullish and generally stable market, most liquid assets, namely stocks and bonds provide the investor with the prospects of capital gains and generating income. At the same time, the sale of a liquid asset can be executed almost instantly, which makes it possible to make a profit from the current market patterns and redistribute the equity fairly quickly to maximize profitability.

Liquid assets in diverse financial situations

During a period of uncertainty or during market downturns, a liquid asset can become another source of much-needed stability. Investors can rely on their cash reserves or sold securities to cover emergency expenses, respond to margin calls, or rebalance prior investments. In this situation, an opportunity to access funds without significant delay or major losses is paramount in the goal to “stop the bleeding” and prevent further erosion of one’s wealth.

How can Prime Brokers help Individuals and Businesses to monetise a liquid asset?

Prime brokers help private banks, wealth managers and other financial institutions to develop additional revenue streams for their clients via securities lending services. Clients can lend out long-term assets or other securities in their portfolio via prime brokerages to maximize their investment returns or even receive cash to help maintain a healthy balance in the face of financial emergency, or build an emergency fund in case they experience financial hardship in the future.

Additionally, clients looking to take a short position on a particular stock or market can do so through their bank's relationship with a prime brokerage, which also operates the necessary securities lending infrastructure.

StoneX Prime is a facilitator that manages the lending process, from connecting lenders and borrowers to arranging for collateral custody and settling fees after the loan term.