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How Are Liquid and Illiquid Assets Different?

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A liquid asset is an item that is easily convertible into money in a relatively short period of time, usually within one day. Such assets are like money itself as the asset owner can very easily and quickly access money in such a trade exchange. An example of a liquid asset would be a stock, bond or mutual fund.

A bond will generally be considered liquid, if it has not been delinquent for 90 days and has a current market value, which has not dropped below its market value. Likewise a stock will be considered liquid if it has not been delinquent and its market value has not dropped below its fair market value. Normally a stock will sell for more than its book value after a company goes public but this can be determined by a number of factors. One of the factors would be how long the company has been public and therefore how much its value has risen or fallen.

Another factor would be how quickly a company is able to convert its assets into cash. If it takes too long then the company will not be able to do this and will lose its liquid assets. The three types of liquid assets are called liquid capital, liquid property and retained earnings. These are further broken down into two further categories, which are equity and retained earnings.

Equity includes shares in a company that has already gone public. This means they have gone to a market where there are buyers and the proceeds are immediately released. However they may still be held by the original shareholders who will continue to own them even if the company becomes publicly traded. When a firm decides to sell all or part of its assets, they are doing this because they no longer have any use for the assets that they are selling. Their remaining assets will then be sold to make a profit.

Retained Earnings on the other hand include stock certificates that the company has issued but does not own. This is what is known as non-liquid asset. Non-liquid assets cannot be converted into cash without losing ownership of them. If an investor wants to sell a non-liquid asset then he will need to take hold of the certificate in order to sell it.

Liquid Assets on the other hand are those assets that can be converted into money by either selling it or passing it on to another party. This means that one can depreciate the value of the assets and increase their market value. If they are sold before they are converted into cash then the seller will have no gain but the purchaser will have to pay capital gains tax. There are many different factors that go into converting one type of liquid asset into another. They can either be changed by the owner directly or indirectly.

The way liquid assets are converted into cash equivalents is by taking the total value of all of the individual units and subtracting it from the current market price per each unit. This is how much can be converted for immediate use. Emergency fund and other long-term investments are considered liquid assets. The emergency fund allows the investor to convert the total value of his investments into immediate cash which can be used to meet immediate expenses or to fund short-term accounts.

Long term investments such as bonds, mutual funds and real estate are considered to be illiquid assets. Illiquid assets cannot be easily converted into liquid cash. When an investor needs cash quickly he usually opts for conversion to liquid form. Short-term investments such as certificates of deposit and treasury bills are considered to be illiquid when they are only owned by a single customer.


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