Money, Banking and finacial marketsWhat does it mean to say that an asset is "liquid"? Provide one example of liquelifying an asset.
Liquid assets are both quick-cash assets and cash itself. If you have a new car, that is liquid since it can be quickly sold; if you have an old car, that is not as liquid because you might not be able to sell it at all. If you have an emergency cash fund in the bank or in your mattress, that is liquid; if your emergency fund is tied up in stocks and bonds, you cannot convert it to cash quickly. A drawer of jewelery is liquid; a basement of canned food is not (at least until society collapses).
"Liquefying" an asset would involve turning the asset into cash. An example is withdrawing investment from a money market fund or selling a mutual fund. Another is selling gold for the market price. Another is cashing in a certificate of deposit (less the early withdrawal fee). Another is holding an emergency sale of inventory for what ever price can be gotten, such as Borders Bookstores recently held across the nationto liquefy assets (at a loss) prior to closing the business.
As the other posts suggestion, something liquid can be make into cash right away. A bank account without any penalties for withdrawal would be liquid. From this definition, there are degrees of liquidity. This is an important point to keep in mind. So, having stocks that can be sold is much more liquid than a home that might take time to sell. Similarly gold coins are more liquid than a car, which might take time to sell as well.
"Liquid" assets (as has already been suggested) can be used very readily to purchase things. If I have twenty ounces of gold and want to take them to a car dealership to purchase a new car, I will have some trouble making the purchase without going through some intermediary steps. If I have $20,000 in cash or in my checking account, the purchase will go much more smoothly and quickly.
"Liquid assets" is often used interchangeably with "cash," because, as noted above, they can be divested quickly without losing much value. Aside from money market accounts, most stocks and most government bonds are considered liquid. In the late nineties and early 21st century, real estate was often considered liquid in some markets. That is most certainly not the case now.
An IRA account would not be liquid because those savings and investments cannot be converted to cash without a significant penalty, but money saved in an investment portfolio of stocks and bonds can be cashed out as needed, usually without penalty. Money that is saved tax deferred (like a 401K) is not as liquid because the income tax must be paid on it upon withdrawal.
An asset is liquid when it can easily be converted into cash without losing much of its value. For example a certificate of deposit is not liquid if you would have to pay a large penalty for early withdrawal. To make assets more liquid, you can convert them from things like CDs to things like money market accounts where there is no penalty for withdrawal.
Often liquid assets are those that are not long term and not necessarily as profitable as other assets that are harder to access. The whole point of having liquid assets is that they are ready sources of cash for when you need them. You don't put your money into something like property if you might need to take it out later on.
A liquid asset is easy to get to. It can be turned into cash, because you can spend cash anywhere, any time, for anything. Basically, you can liquify an asset by selling it. For example, in this market real estate is not a liquid asset. It cannot be sold quickly!