Cash is king. Money, money, money. Gimme the green. However you want to phrase it, cash is the most liquid asset around. But the best liquid investments are almost as good as cash. What are liquid investments?
Liquid investments are any type of investment that can be easily converted to cash without losing much value. The best of these can be transformed into cash at a reasonable price.
Cash equivalents are often considered to be some of the best liquid investments. Some of the most popular include money-market accounts, high-yield savings accounts, certificates of deposit (CDs), and U.S. treasuries. These investments can easily and readily be converted to cash, making them sought-after investments for certain investors. Stocks, bonds, and mutual funds, on the other hand, are not the best liquid investments, as there is a process in converting them to cash.
Recognizing the characteristics that make an investment liquid
What defines the liquidity of investments?
First, you need an abundance of interested buyers. It’s essential to have interested buyers to pay for these liquid investments.
Next, the investment itself must be part of a reputable market. This helps establish the number of interested buyers because the market is known and reliable.
Finally, it should be easy to transfer the asset to cash.
Looking at some of the best liquid investments
High-yield savings accounts: The most significant difference between traditional savings accounts and a high-yield savings account is the interest rate. Although the interest rate changes in relation to the benchmark set by the Federal Reserve, a high-yield account will always have a higher interest rate than traditional accounts. Savings accounts are considered safer than many investments as the money is federally insured up to $250,000. Money from high-yield savings accounts can be easily accessed, making them an example of a top liquid investment.
Money market accounts: These accounts are similar to savings accounts, but with a few added benefits. First of all, money market accounts traditionally pay higher interest rates than comparable savings accounts. Money market accounts also come with checks or debit cards, making it even easier for investors to access their money. Although these accounts are very liquid, they may involve balance requirements or higher minimum deposit rates.
CDs: Some CDs are more liquid than others. This is important to understand from the start. The CDs that are the most liquid are often no-penalty CDs. These investments allow for money to be withdrawn from the CD without a penalty. Other CDs will penalize investors if they withdraw money from the CD before the maturation date. No-penalty CDs often come with lower interest rates, but remain liquid without penalties for early withdrawals.
The best liquid investments and stocks
Stocks can be seen as liquid, but they are not the most liquid investments. They also come with greater levels of risk than top liquid investments like high-yield savings accounts. The liquidity of stocks will also change depending on the market’s interest in the specific stock. If the stock has fallen out of favor, then the liquidity will be even less.
Do you invest for liquidity, or are you more concerned with other characteristics in the investments you buy?