What is liquidity? Understand how it influences your investment

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What is liquidity?  Understand how it influences your investment

Table of Contents

Liquidity is an economic concept that considers the how easily an asset can be converted into cash. The speed of conversion of this investment, without significant loss of value, measures the liquidity of operations.

Anyone who has looked for investment options has certainly come across the term liquidity. At the financial market, liquidity is one of the most important characteristics of any application and has a high power of influence over its capital.

If you want to learn more about the financial market, we recommend reading the article: ‘Financial market: what it is and how it works. ‘

To better understand the term what liquidity is and how to create a complete and diversified investment portfolio, follow the post and find out in detail. Good reading.

What is financial liquidity?

The concept of liquidity is basically the ability of an application to convert to cash in the current account. That is, the possibility of redeeming investment funds. The faster this process happens, the more liquid this investment has.

Liquidity is not a type of investment, but a characteristic of it. In this way, you can invest your money in applications with more or less liquidity.

Some financial institutions even use identification codes to assess the liquidity of an investment. An example is the “D + Nº” (D is the redemption day and the Nº is the number of working days for the money to be released) which is used to categorize the investments according to the preferences and conventions of the financial market.

Understand better in the table below:

Term Explanation Example
Daily Liquidity or D + 1 The money will enter the account on the next business day after the redemption request. Selic Treasury.
Immediate Liquidity or D + 0 The money will enter the account at the time of the redemption. Current Account or D + 0 Investment Funds.
Liquidity at Maturity The money only returns at the end of the investment maturity. Fixed income securities with no immediate liquidity such as LCI and LCA.
D + 30 The money only returns after 30 days of the redemption request. Investment Funds D + 30.
Zero liquidity The money does not have a deadline to enter the account. This is the case for those who sell a property; the process can take months and even years.

How to choose between high and low liquidity investments?

To understand liquidity, which is essential to ensure an attractive investment, you need to rate the intensity of your investment and the purpose of the investment. financial organization.

In the case of intensity, there are the following options:

  • Low liquidity: they are assets whose immediate withdrawal of the value without losses is more difficult.
  • Average liquidity: they are assets whose redemption of capital without losses is not guaranteed, nor does it happen immediately, but it is possible.
  • High liquidity: are the easy rescue assets.

In the case of objectives, liquidity is directly linked to the ability of organizations to settle their debts. Thus, there are:

  • Chain: the ability to meet short-term obligations.
  • General: the ability to afford medium and long term determinations.
  • Immediate: the ability to use all available values ​​for financial emergencies.
  • Dry: as well as current liquidity, it is focused on short term. However, it does not consider the stock as a current asset.

What is the difference between liquidity and profitability?

difference-between-liquidity-profitability

A very common mistake is to confuse liquidity with profitability. Although they are linked, they are different economic concepts.

A highly profitable security does not necessarily have a high liquidity. Therefore, it is essential to understand its particularities to be able to choose the most appropriate asset according to your income, planning and amount.

THE profitability refers to percentage of remuneration that you will receive when applying to a specific title. And the liquidity relates by ease and speed with which this percentage is converted into cash.

As we said, profitability and liquidity are not necessarily proportional. So it is a matter of strategy, you must define what you want to prioritize when investing – profitability or liquidity.

Want to see some examples?

If you need the capital invested urgently, regardless of the reasons, liquidity should be prioritized. Now, if you have a good financial contribution and are confident in investing part of your capital in the long term, profitability should be prioritized.

If you are starting an investment and do not have experience in the financial market, prioritize liquidity, as it is a safer feature and profitability. Unforeseen events happen and inexperience in the area can be harmful.

Facing the need to redeem an investment even if it yields 120% of the CDI (Interbank Deposit Certificate), if it has low liquidity, access is practically impossible and makes the application uninteresting.

Normally, the higher the yield, the lower the liquidity, which is important to highlight. It is necessary to know how to invest in the short, medium and long term taking into account the characteristics necessary to reach your goals. goals.

Otherwise, you may fall into the inevitability of seeking a loan to resolve the situation, acquiring debt and compromising your financial health.

Liquidity characteristics of the main financial investments?

Check below the liquidity characteristics of the main financial investments in the country:

Savings

Savings has a high liquiditybecause the money is redeemed almost instantly. Just request the redemption at the financial institution and the money is in your account.

Public titles

For government securities, liquidity is average and can only be evaluated once a week. Still, there is no guarantee that the title will be sold. In addition, there is an end date for redemption.

CDB (Bank Deposit Certificate)

Another application in high liquidity fixed income is the CDB (Bank Deposit Certificate), the way in which you lend money to banks in exchange for interest. The conversion of this investment is also practically immediate.

Investment funds

Investment funds have liquidity ranging from high to medium, because depending on the type of fund, the redemption is not immediate. Some funds may take one to four business days for the money to be available in your account.

Properties

In the case of real estate, liquidity is low and should have little priority. Usually, months or even years are required to sell it for the price it really is worth. Therefore, profitability should be the focus here.

Actions

For this investment profile, liquidity is variant and must be carefully considered. When the stock is heavily traded, the sale is practically instant, that is, liquidity is high.

But for low-traded stocks, selling the asset at the suggested price becomes a challenge. Therefore, liquidity is less. To the actions, liquidity depends on the quality and valuation of the asset.

Direct Treasury

The Treasury Direct it has liquidity guaranteed by the National Treasury, so it is even more attractive than savings. When requesting the redemption, the money will be available the next day without any loss of profitability.

Therefore, in addition to seeking information on the various modalities of investment, it is essential that you understand the liquidity of the assets.

Organize yourself financially for what can happen in the short, medium and long term, and consider emergency situations. Liquidity is commonly confused with profitability, it should be a highlight in this planning.

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Were you able to solve all your doubts about the liquidity of financial investments? If you still have any questions, leave it for us in the comments!

Conclusion

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