What Is Liquidity?
Liquidity is an important factor to consider when you evaluate a potential investment or consider your overall financial situation. It's a measure of how easy it is to sell an asset and convert into cash. In simple terms, liquidity is basically how easy it is to buy and sell your investments.
Liquid assets can be converted into cash without any change in the asset value.
Illiquid assets are much more difficult to convert to cash and may decrease in value when converted.
Before investing in stocks, investors will often weigh a stock’s liquidity with its potential for gain.
Liquidity allows investors to quickly convert their investments into cash in order to reinvest or spend on goods and services. Additionally, it gives investors the flexibility to react to the ups and downs of the market, ultimately reducing risk.
As you put together your investment portfolio, make sure to consider how you will access some of your wealth if needed. Consider your financial goals, both long-term and short-term. Evaluate your financial situation, and think about what you would do in an emergency situation. Would the investment limit you to the point that you won’t be able to easily access your wealth if you needed it quickly? Do you have other, more liquid sources of money that you could turn to should such need arise? Plan your investments and your finances in advance to make sure you have enough liquidity to fit both your goals and your needs.