Illiquid Investments and What You Need to Know
So, you want to be an investor. That's great, but do you know what you're getting yourself into when you first start this journey? If you have some questions about the world of investing, welcome to the club. Many question various aspects of their investment portfolio and how they should approach the market. You were asking the questions that you were ahead of the game and should realize that asking questions means that you are already ahead of the game.
One thing you need to be on the lookout for when you begin to invest is how liquid a particular investment is. We will cover what this means, why it matters to you, and why you need to do everything you can to avoid illiquid investments.
What is liquidity?
Liquidity has a different meaning when speaking about investments. It refers to how easily a person can get in or out of a particular investment. In other words, it has to do with how easy it is to sell a specific investment and receive cash back for that investment.
Some assets are highly liquid and easy to sell because there are people who are always standing at the ready, ready to purchase that investment from you. For example, many stocks are considered liquid investments as they tend to have buyers available on the other side at virtually any time. That being said, even some stocks are not necessarily liquid. You will need to do some research before assuming this is the case.
What is an illiquid investment?
An illiquid investment is an asset that is difficult to sell to another person. This may be because the process of attempting to sell it in the first place is somewhat burdensome or because there are not that many buyers for the asset that you were attempting to sell. In either case, you need to exercise extreme caution when considering investing in anything that may be considered illiquid in any shape or form.
Illiquid investments are considered particularly dangerous because you may find yourself holding something that is quickly falling in value and not have anyone that you can sell it off to. Additionally, you may find it difficult to cash out of your investment if an emergency comes that requires you to put together as much as you possibly can.
Examples of illiquid investments
There are plenty of examples of illiquid investments out in the wild. For example, most homes are considered to be a relatively illiquid investment. This can change from time to time, depending on what the real estate market is looking like. At present, the real estate market is rather hot and most homes are considered decently liquid. However, it can still take a matter of months before the sale of a home goes through. Thus, this is slower moving and what you would expect from a typical stock.
Unique assets such as artwork, jewelry, trading cards, and other valuables may also be considered illiquid if there is not a massive market for this specific type of asset that you are holding. They may indeed have value to them, even significant value. However, you need to make sure that you get into investments that are also liquid, so you can sell them when you are ready to do so.
Those beginning their investment journey should consider investing solely in highly liquid assets. This includes stocks of major companies that are household names. Investments like this may not be as exciting or profitable as some other types of investments. However, they will at least provide you with the liquidity you need so you can rest easy at night knowing that you can sell them if you need to.
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