Sunday, December 26, 2010

Liquidity

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

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