What is liquidity?

Every asset has a liquidity, from property to your collection of antiques and even the cash in your bank. However solid they may seem, they can be converted into money in your hands. And that's asset liquidity. How quickly an asset can be converted into money and how close to its original value it is after you've converted it.

Key takeaways

Asset liquidity measures how quickly an asset can be converted into cash and how close to its original value it remains after conversion.
Shares and stocks are liquid assets that convert to money efficiently, while property is illiquid because it's difficult to convert quickly without sacrificing value.
In 2013, UK financial regulators established minimum liquid asset requirements for banks following the collapse of Northern Rock and Lehman Brothers.
High liquidity doesn't guarantee value retention—it only means you can access whatever current value exists in cash form very quickly.

Where have you heard about liquidity?

Back in 2013, UK financial regulators made history when they agreed new rules on the minimum amount of liquid assets that all banks must hold. This happened after the collapse of Northern Rock and Lehman Bros, to try to ensure banks were always in a position where they had assets that could quickly be converted into money.

What you need to know about liquidity.

Think of an asset's liquidity as how easily it could become 'useable' money. Shares and stocks are liquid assets as they can be converted into usable money very efficiently. This doesn't mean that they hold their value, just that whatever value they have at the moment you decide to sell is the actual amount you get access to in cash, very quickly.

Property, on the other hand, is an illiquid asset because it can be difficult to turn into money quickly, without sacrificing value.