A barrel of crude oil is literally an asset in liquid form. So is a rare bottle of wine or an expensive vial of exotic perfume. But those kinds of things aren't what the financial industry is referring to when it talks about "liquid assets." An asset is liquid if you can sell it without too much trouble. Stocks are among the most liquid assets around, and bonds can be pretty liquid as well.
In investing jargon, liquidity refers to how easily you can sell an asset for cash without the sale affecting its price. The second part of that definition -- "without the sale affecting the price" -- is the key. You can get someone to take just about anything off your hands if you lower the price enough. But the more you have to lower the price, the less liquid the asset really is. Say you want to sell your house. If your city has plenty of people willing to pay your asking price, then the house is a fairly liquid asset, as far as real estate goes. But if you have to knock $50,000 off your asking price just to get traffic in the door? Not so much.
Say you own a share of stock, and you're just itching to sell it. In most cases, you don't actually have to worry about how much to charge for it because the price is set by market activity -- the supply of shares offered by sellers and the demand for shares among buyers. Go to any financial website and punch in the company's ticker symbol and you'll see the current market price. If you want to sell your share, someone will usually buy it at the price set by the market. So stocks fulfill both conditions of the definition of liquidity: You can usually sell them easily, and you can do so without having to drop the price. You'll probably pay a commission to your broker, but that's just the cost of doing business.
Note the word "usually" in the discussion about selling stocks easily. Stocks that trade on major exchanges, such as the New York Stock Exchange or the Nasdaq, are readily liquid. But not all stocks trade on big exchanges. Some don't trade on any exchange at all, but rather on computer networks operated by brokers and dealers. These "over-the-counter" stocks are typically less liquid than exchange-traded stocks. The companies they represent are smaller. Sometimes they're troubled. Sometimes they're both small and troubled. Investor interest in such stocks is lower, so you may have a harder time selling. Michael Edleson, a vice president at the National Association of Securities Dealers, offered this rule of thumb in an interview with American City Business Journals: If fewer than 10,000 shares of a stock trade on an average day, it's not a liquid stock.
Bonds don't get the kind of attention that stocks do. For one thing, they're not as sexy: Whereas stock represents an ownership stake in a company, a bond is essentially an IOU, a promise from a company or government to repay borrowed money, typically with interest. It's also harder to determine the current market price of a bond. You may have to go through a broker to find it. The liquidity of a bond usually hinges on risk -- the risk that the bond issuer won't actually repay the money. The less liquid the bond, the higher the commission you'll have to pay to sell it, which has the effect of lowering your price. Some bonds are extremely liquid, such as those issued by the U.S. Treasury and major corporations. Bonds from weaker companies or financially troubled cities may be less liquid.
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