Q:

What is the definition of liquid capital?

A:

Liquid capital is an easily convertible asset, such as money. Liquid capital is the opposite of a long-term asset, such as real estate or a business.

Also called fluid capital, liquid capital is cash, or something that can be converted into cash very quickly without a high impact to the amount of cash received. Examples of liquid capital possessed by most individuals include savings accounts, stocks and checking accounts, while liquid capital assets possessed by organizations and governments consist of stocks, money market instruments and government bonds.

For an asset to be considered liquid, it needs to have an established market that can absorb the sale of the asset without the price being negativity impacted. For example, if the selling of all of one person's or organization's apples would flood the market, resulting in the price of apples dropping noticeably, then apples cannot be considered a liquid asset.

The most liquid market in the world is the foreign exchange market because of the trillions of dollars exchanging hands every single day; this huge amount of material being exchanged means that one single individual cannot influence the market or its exchange rate.

Liquid capital is one-half of a person's or organization's net-worth; the other half being long-term assets and possessions.

Sources:

  1. investopedia.com

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