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What is ‘Liquidity’?

How easily something can be exchanged or moved into something else. Money is fully ‘liquid’ because it can be exchanged for most other things. When a person sells an asset – be it shares, a house or a car, they are said to have had a ‘liquidity event’. This is because their wealth has gone from being ‘illiquid’, i.e. unspendable in the form of a car, to liquid, i.e. fully spendable money.

In any investment portfolio an investor will always seek to have a high-degree of liquidity. This means they will hold some cash which can easily be moved into another asset, or they will hold assets that can quickly be sold in case they start losing value or they want to take all their investments out of risky markets.

Assets such as houses, cars, or even whole companies can be seen as having low liquidity. This is because it is very hard to move your money out of them quickly – if you fear a crash in property prices you probably can’t sell your house today.

The advantage of liquidity is that it gives you freedom to buy and sell an asset quickly. Gold is one asset that has been given liquidity beyond the markets. You don’t have to be a trader or a gold-broker if you want to buy and sell it. This is because gold has now been monetised and ingrained into digital payments – giving it complete liquidity, as with other forms of money.