7.2.3 Investment characteristics: liquidity

Liquidity is the ability to cash in or sell an investment quickly at or near the current market price.

• Listed stocks and government bonds are liquid, because you can usually sell them easily. (You may not get the price you want, but you will get the market price.)
• Your home or other property is not very liquid. It may take several months to sell real estate, and more months before you collect the cash for it.
• You may be able to cash in a term deposit before the term is up, but usually you will lose some or all of the interest you expected. Term deposits are illiquid because you usually cannot get the full value if you cash them in early.

Liquidity affects the value of an investment. You expect to receive a higher return if you give up the ability to cash in your investment quickly. Highly liquid investments therefore can charge a higher price than similar investments that are less liquid. For example, stocks in a company that are traded on a public exchange might cost more than stocks in a similar company that are not traded publicly, because you can easily re-sell the publicly traded stocks.