Liquid assets by definition are ones you can convert into cash quickly. Investments you can cash provide a safety net for paying the mortgage and other crucial bills in an emergency. Stocks normally qualify as liquid because you can usually sell them easily. In fact, these days you can sell stocks more quickly than ever over the Internet. However, a variety of factors make some stocks more liquid than others.
Supply and Trading Volume
The number of shares for sale and the average number of trades daily affect the liquidity of a particular stock. The shares for sale make up the supply of stocks. The number of shares actually selling each day is the trading volume. If both the number for sale and daily trades are high, a stock is more liquid. If the number of stocks for sale or the number of trades falls, stocks become less liquid. Stocks remain liquid only when both sellers and buyers are available and able to complete trades.
A stock sells when a buyer and a seller agree on a price. The spread is the difference between the prices buyers want to pay and sellers want to receive. According to "Business First," this can vary from 13 percent for stagnant stocks to as low as 0.3 percent for actively traded stocks on the Nasdaq Index. The stocks with the lowest spread are more liquid because sellers and buyers are near to agreement. Furthermore, low liquidity also tends to decrease a stock selling price. An investor who needs cash in a hurry sometimes has to sell for less than desired when the market is weak.
Large or Small Caps
In general, large-cap or large company stocks are easier to sell than stocks in small companies, or small-cap stocks. With many shares and high demand, large caps trade in large numbers every day. Daily volume for major companies such as Microsoft comes to multiple millions of trades, according to "Business First." Small-cap stocks, on the other hand, often have a daily trading volume of 100,000 shares or less. This makes small caps much less liquid, especially those with very low trading volume. Listing on a major exchange such as the New York Stock Exchange usually makes a stock easier to sell. However, this is not true if trading volume is very low.
Some stock sectors are more liquid than others, depending on current economic conditions. For example, transportation stocks vary in liquidity along with the economic cycle. Financial services, especially regional banks, tend to have low liquidity. Utility stocks also can be difficult to sell.
Comparison with Other Investments
Although stocks are generally liquid, many investors keep some of their emergency funds in vehicles with higher liquidity. Savings accounts, money market accounts and checking accounts normally allow quick access to your money without risk of loss. Money market mutual funds, although not insured, also allow easy access by check. Cashing other investments sometimes requires a penalty. You can sell U.S. government savings bonds after holding them one year. However, you must pay a penalty if you cash them before five years. Similarly, you must pay a penalty to cash out certificates of deposit early. Real estate, antiques and collectibles are less liquid than stocks because they are slow to sell.
- Forbes Financial Glossary: Liquid Assets
- Business First: Don't Get Stuck with a Stock
- Northwestern University: Stock and Bond Liquidity
- North Dakota State University: Saving and Investing Today
- Treasury Direct: I and EE Savings Bond Comparison
- Securities and Exchange Commission: Tips for Online Investing
- Bankrate.com: Which CD is Right for You?