Sunday, December 26, 2010


Liquidity is the ability to turn an investment into cash in a timely manner at minimal cost. In terms of managed funds it is the ability to access your investment, i.e. the ability to withdraw your money in a timely and cost efficient manner. Most mutual funds will be relatively liquid as they tend to hold marketable securities like stocks and bonds, as well as maintaining a cash liquidity buffer (but not too much as this will limit returns; thus the trade-off between liquidity and returns). As an example a bank deposit has relatively high liquidity because most of the time you can just go to the bank and withdraw the cash; on the other end, a real estate investment may take a long time to sell, like-wise private equity can be very hard to sell - at the right price. This also highlights the concept of a liquidity premium.

Synonyms: Trading turnover, Trading liquidity, Saleable, Cash-up, Cash equivalents, Liquidity premium

If you have any questions, or disagree with the definition, or if you have anything to add then please do add your comments in the box below.

No comments:

Post a Comment