Liquidity

Liquidity describes how quickly and easily you can sell an asset and receive cash without having to accept a significantly lower price. A share in a major company listed on a large stock exchange can typically be sold in seconds at the current market price—it is highly liquid. A residential property, by contrast, may take months to sell and involves substantial transaction costs—it is illiquid.

Liquidity matters for investors in several ways. Highly liquid portfolios give you flexibility to react to life events or opportunities. Less liquid investments can offer higher returns as a premium for accepting that you cannot exit quickly—this is known as the liquidity premium or illiquidity premium.

A common rule of thumb is to keep an emergency fund in highly liquid, low-risk assets—such as a savings account or money market fund—covering three to six months of expenses, before locking money into less liquid investments.