Understanding Liquid and Illiquid Assets

Liquidity refers to how easy it is to buy and sell an asset. The easier and faster it is to transact, the more liquid an asset is, and vice versa.

Liquid Assets: Stocks and Bonds

Stocks are among the world’s most liquid assets. Stocks trade in open markets where millions upon millions of people and companies buy and sell daily. Pricing is fast and efficient—unless you’re trading a gigantic lot of stocks, the price you see quoted is typically very near the price you’d get if you sold at that instant. Transactions are completed in the blink of an eye. While trades usually take three days to settle, most brokerage houses have systems to let you access cash sooner if need be.

Bonds, overall, are less liquid than stocks. They mostly trade over-the-counter, not on open exchanges, making trading more difficult, time-consuming, expensive and opaque. That said, asset liquidity varies by bond type.

  • US Treasury bonds are the most liquid in the world. They have the greatest supply, with about $13 trillion outstanding, and they’re traded often. They also settle fast—generally, the day after the trade.
  • Other nations’ bonds are less liquid, purely because supply is smaller. UK gilts and Japanese government bonds are as freely traded as US Treasurys, but there are only about $2 trillion and $9 trillion, respectively, in circulation.
  • Corporate bonds are also less liquid. For one, supply is relatively small, at $7 trillion, and each individual issue is relatively tiny. They also aren’t traded as frequently, and the marketplace is less robust—making it more opaque.
  • Municipal bonds are probably the least liquid. Their market is about $3 trillion, but each bond is issued in a very small lot—often just millions of dollars. Because of this, it can be difficult to find a buyer for an individual issue if you need to cash out. Pricing is also difficult: Most securities prices are as of the most recent sale, which doesn’t tell you much if that sale was a long while ago.

Illiquid Assets: Real Estate, Non-traded REITs, Annuities, and More

Real estate is an illiquid asset. You can’t sell your home overnight and receive its market value. There is no place where you can find your exact home’s price ticking. And locality can greatly affect even structures’ values. It could take months (and potentially lots of haggling) to find a buyer. Once the deal is closed, the transaction sits in Escrow for weeks. There are also inspections, commissions and closing costs—time-consuming and costly.

Non-traded REITs are also illiquid assets. Unlike normal REITs, they aren’t bought and sold on exchanges. Their values aren’t transparent, making price discovery difficult on the secondary market, where buyers may be few and far between.

Annuities are illiquid. Even though many are invested in liquid assets like stocks and bonds, annuities are contracts with restrictive redemption terms, and if annuitized, may not be redeemable at all.

Other less liquid assets include private placements and partnerships, which have long lock-up periods and very limited redemption windows, limiting access to your money. Trading on the secondary market is often prohibited, the universe of buyers is small, and share values are typically determined by investment companies (usually venture capital funds), not the open market.