An investment that you can easily sell qualifies as a liquid asset. You must be aware of the liquidity of your stocks and bonds so that you know how easily you can get your cash out of them. No ratings exist for the liquidity of stocks and bonds, but if you follow some guidelines you can determine whether an investment is liquid.
A stock that sells less than 10,000 shares a day is illiquid, according to Michael Edleson, vice president of economic research at the National Association of Securities Dealers. If you hold shares of that stock, on a given day you might not find many interested buyers. If you are in a hurry to sell, you might have to lower your price to attract a buyer.
Stocks of major corporations can sell many millions of shares each day. This means you will find it easier to find buyers for such a stock, because the demand is very high. If you offer your stock at a reasonable price, based on the price range of that stock for the day, you can sell it in seconds. Such a stock makes a good place for cash to which you want easy access, because you are very likely to be able to sell it when you want to.
The bond market does not list how often bonds sell, so you don’t have the same type of guide for the liquidity of bonds that you have with stocks. If a company is close to bankruptcy or has difficulty paying its debts, that company’s bonds will seem less attractive to investors. If you hold such a bond, you can have trouble finding a buyer for it. Illiquid bonds often sell at a discount, so you must lower your price on the bond to find someone to take on the risk of such an investment.
Liquid bonds include U.S. government bonds. Billions of dollars in these bonds sell every day. In other words, you could find it relatively easy to find a buyer for your government bonds. If you hold the bonds of a major corporation that makes profits, you will probably find those bonds also remained liquid, because many buyers would want them.
No stock or bond offers complete liquidity. Only cash does that. Keep in mind that when you sell a stock or bond, you will have to wait for the proceeds to settle. The money must actually change hands between the brokers before you get your cash. Settlement usually takes three business days. Even if you sell your stocks or bonds quickly, you won't have your cash until the funds settle.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.