What Is Investment Liquidity

Investment liquidity is one of the aspects of financial planning that is most commonly taken for granted despite its crucial role in investing. From a financial point of view, it refers to an investment’s accessibility, which is determined by finding the amount of time required for the investment outcome to arrive should the investor need it at once.

To illustrate the concept of investment liquidity, take these examples.

Money market funds are funds that can be accessed through a connected checkbook, or through any means of easy transmission to a bank account. This ease in accessing money market funds makes this type of funds highly liquid.

The same is true with savings accounts, which are usually as good as having cash in your checking account.

On the other hand, retirement account funds, which require extensive paper work and processes to redeem, are not liquid. Retirement account funds also require some time before it gets to the investor’s mailbox or bank account. Thus, it cannot be readily accessible to the investor when he or she experiences an urgent need of the money.

In the same way, annuities are also known to be among the least liquid of all forms of investment, since they are intended for generating streams of income, and therefore, prohibit its redemption once it has already been invested.

The ease or difficulty in accessing an investment, however, is not the only factor determining the liquidity of an investment, though it is the most fundamental. Like other terms in financial planning, “liquidity” also experiences shifts and additions in its meaning as time progresses and as changes in the industry arise.

Today, the volatility or possibility of an investment is also considered by some as an aspect of investment liquidity.