Why Is Liquidity Important?
an asset's liquidity represents the ease with which that asset can be converted from an investment to cash. liquid assets are those which are easy to convert to cash quickly and experience little to no change in asset value when converted. illiquid assets are harder to convert and may have a substantial deduction in value once converted. cash is the most liquid assets there is, whereas real estate is an example of an illiquid asset because not only can it be difficult to quickly sell home or another property but may also be a significant difference between the paper value of the property and the amount that can be sold for. when making an investment, investors will often weight anticipated liquidity of an asset along with its potential for gains. before making the investment, liquidity is important to investors for many reasons including liquid assets give them accessible means to reinvest in other assets when prices are low, liquid assets reduce some investing risks by ensuring that an investor will be able to quickly react to market moves and lock in realizing investment gains. liquidity is also important to investors as a mean to support their lifestyle needs. a retired individual might like liquid assets because he or she needs to able to draw income from their investment portfolio now not later. a young family with children might like liquid assets because they provide them the freedom to convert assets into cash as needed.