What is a Liquid?
A liquid is something that can move from one place to another quickly without changing form or quantity and volume.
Crafty financial people snatched this purely scientific definition for their own use.
What is Liquidity in the World of Finance?
In the world of finance, liquid means that you can access your money quickly without meaningful change in value. Or, it can also mean that you can access your money in a matter or hours or days and get it back — even if it may have changed in value.
Examples of liquid investments are checking accounts and money market mutual funds.
What is the Opposite of Liquid?
The opposite of liquid would be illiquid.
Private equity is an example of an illiquid investment. In a private equity investment you give your money to the fund for typically a term of 10 years. Over that time period, you are not able to access your money—unless they decide to return it to you early. At that point, your money may or may not have changed in value—sometimes significantly.
A home is also an illiquid investment. You can’t simply wake up, decide to sell it and take cash the next day.
Any Other Ways ‘Liquidity’ Can Be Used?
Yes. Or else we wouldn’t have mentioned it. Liquidity refers to– how much money is out there.
For example– when the Federal Reserve prints more money through Quantitative Easing measures (what is that?), that creates liquidity.
When the European Central Bank reduces interest rates– trying to get people to spend and borrow money (anything but saving), that creates liquidity.
Liquidity is better than illiquidity. It generally leads to higher stock prices in the short run. It could lead to creations of bubbles– money flowing into parts of the market too fast. And it could lead to inflation. But the short term outcome is generally higher stock prices.
Love Bull & Bear?
If you have friends who would like us, have them sign up here!
Also… we not only tweet, but we collect friends.
