What Is The Difference Between Liquid And Illiquid Assets?
In today’s world, it’s easy to trade financial assets like stocks on exchanges such as Nasdaq, New York Stock Exchange or the Nigerian Stock Exchange Market. Asset allocation is paramount in financial investment.
As a matter of fact, it is the asset allocation that determines the performance of your collection of investments in your portfolio.
Some of these investments could be between liquid and illiquid investments. Actually, there are disparities between liquid and illiquid investments. What do they imply and what could possibly be the difference between both terms?
Many investors find it difficult to give a concrete answer when questioned about the distinct features that make liquid securities unique from the illiquid securities. Both of them have unique features and characteristics and both of them have their risks as well as their benefits. In this post, we will look at the differences between liquid assets and illiquid assets.
The Difference Between Liquid And Illiquid Assets
Liquid assets are assets that are likely to convert into cash quickly. They can either be in the form of cash or property; these assets can be turned into cash without substantial loss in its value.
On the flip side, illiquid assets are assets that cannot be turned to cash quickly. If you have an illiquid asset in your possession, it will be difficult to turn such an asset to cash rapidly.
Secondly, liquid markets are known for their high rate of trading assets such as currencies, treasuries, commodities, large-cap socks etc. When you have these assets, you are assured to find a buyer to purchase them.
On the contrary, it is difficult to sell assets and securities fast in an illiquid market. The reason is that the buyers for such asset isn’t much or the demand is low.
Also, another difference between liquid assets and illiquid assets is that the later is considered as a risky investment. Since illiquid assets are difficult to sell, sellers may be forced and pressurized to discount their asking price just to make sales or woo potential buyers.
Apart from this, illiquid assets are incredibly discrepant between their asking price and bidding price. This means that the price isn’t consistent and the difference between how much you purchased it and how much you sell it will be larger than normal.
Due to the high level of the discrepancy of illiquid assets, a lot of sellers lose plenty of money because they tend to sell quickly.
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