Understanding the difference between liquid assets and liquidity can be a key determinant in excelling at short and long term investments. The concepts are similar in many aspects. However, there is a thin line of demarcation between them. A major takeaway in understanding these basic concepts can help an investor choose the right type of liquid asset to cater to their needs.

Liquid assets
Liquid assets are those that can be converted into cash readily. They are termed so because of their fluid rate of conversion. These assets do not lose their value in the process of conversion to cash. If the value is lost, it is mostly negligible. Liquid assets are important for businesses. The ability to have some cash at hand or assets that are readily convertible to cash would mean that it can help in covering expenses that occur during the normal course of business. It will also keep the business in question prepared for emergencies and contingencies.

Types of liquid assets include:

• Cash at hand
• Cash deposits in banks (mostly savings accounts)
• Marketable securities
• Amounts and bills receivable by way of cash owed to the business
• Treasury bills
• Bonds

Liquidity
Liquidity is the determinant that proves if a business has sufficient liquid assets to cover all regular expenses, current liabilities, and some amount of tangible surplus for emergencies. A watered-down example that conceptualizes liquidity is essential. If a person earns sufficient income in stipulated time to pay off all their dues without sacrificing immediate needs, they are said to have attained liquidity.

The possession of sufficient liquid assets to pay off current liabilities is the concept of liquidity. If one cannot pay their bills and have to sell off their fixed assets to make ends meet, they have not attained liquidity. Fixed assets, like a house or land, cannot be sold to make ends meet for day to day expenses.

The importance of liquidity
For a business, achieving liquidity is the healthiest sign of a well-run organization. At a time of crisis, the maintenance of liquid assets can make the difference between survival and closure of the business. The most apt illustration is the Financial Crisis of 2008. It became apparent that banks did not have enough liquid assets to meet their obligations. To ensure stability in the event of such a crisis, it was deemed that the banking industry must be better prepared. Hence, the maintenance liquidity coverage ratio was mandated. The rule states that banks will have to maintain enough liquid assets to cover anticipated expenses in the succeeding 30 days. Banks have the liberty to maintain more than the stipulated amount to cover unexpected expenses. This is known as liquidity plus where companies maintain more than the stipulated amount to ensure that it can cover emergencies as well.