Liquidity

How quickly and cheaply an asset can be converted to cash without moving its own price.

Example

A public stock can usually be sold in seconds; a house can take months, and a private fund can lock money up for years.

Important

An illiquid asset can look perfectly stable purely because nobody is pricing it every day - that is not the same thing as being safe.

Related terms

• Public markets — Markets where anyone can buy or sell a security, such as a stock exchange.
• Private markets — Markets for ownership stakes that are not listed on a public exchange - startups, private companies, and many funds.
• Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.

Lessons that explain it

• A deposit is a loan you made to a bank — Money in a savings account is not money you are holding. It is a debt the bank owes you, and what makes it safe is a government guarantee with a limit - not a property of money itself. (9 min)
• Interest, and a rate somebody else can change — The whole return is a rate applied to a balance. What makes it unlike every other asset class is that the rate is set by the institution, can be changed at will, and you have agreed to that in advance. (10 min)
• The spread between the policy rate and what you are offered — There is no market price here. The price is the gap between what the central bank sets and what the institution passes on - and that gap widens and narrows in a pattern that is not symmetric. (11 min)
• Appraising one account: rate, access, cover and the expiry date — Six checks on one specific account. The headline rate is the one everybody runs and the only one that can be withdrawn without warning - so it belongs fourth, not first. (12 min)
• Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
• Two prices: what the holdings are worth, and what somebody will pay — Net asset value is an accounting fact struck at a moment. An exchange-traded fund's market price is a live opinion. The gap between them is sometimes a mispricing and sometimes the more honest number. (12 min)

All 578 terms in the Investing glossary