Assets that cannot be readily converted into cash are termed illiquid assets. Here is a brief overview about the same.
Most of us are familiar with the term assets, which can be simply explained as a valuable item possessed and owned by a person or a firm. However, if you examine the financial perspective of assets, you may find that it is a vital component of the economy, and is divided into different categories. They include current assets, fixed assets, tangible assets, intangible assets, liquid and illiquid assets, etc.
The terms liquid and illiquid assets are mostly found to be associated with market liquidity, which is defined as the degree of ease, with which an asset can be converted into cash, without any reduction in its price. Those assets that can be easily converted into cash are called liquid assets, and those that cannot be easily converted into cash are termed as illiquid assets. Cash is one of the basic and commonest form of liquid assets. Apart from that, savings account is another example of liquid assets, as they are also a source of immediate cash. If jewelry can be sold readily, that too at a higher price, then it can also be considered as a liquid asset.
Illiquid assets can be defined as those assets that cannot be readily sold or exchanged for cash, without any loss of value. One of the common illiquid asset examples is real estate. A house or a piece of land cannot be sold for cash, as readily as you withdraw money using your debit card. In case of illiquid assets, you must search for prospective buyers, who are ready to buy the asset, at the price quoted by you. It may also happen that at times, you have to sell the asset at a price that is lower than the price for which you bought it. Even cars, antiques, stocks with low trading volume, etc., are considered illiquid assets.
If you examine the various aspects of illiquid assets, the most basic feature is its ability to get converted into cash, without a loss in value. So the very first point is that an asset becomes illiquid, when it becomes difficult to get it converted to cash readily. The most common reason for this is the lack of demand for such assets. This may vary from time to time, and from one market to another. For example, a crash in the real estate market may make it difficult to sell a real property, without facing a loss.
Sometimes, the absence of an established market makes it difficult to sell an asset readily, that too without a loss in value. If an item is traded less frequently, it can also be classified as an illiquid asset. In case of an asset, like real property, which takes time to fetch a potential buyer who is ready to buy the asset for a price quoted by the owner, the time and money required for such a sale is another factor, responsible for making it illiquid.
Even though illiquid assets are not readily saleable, they are valuable. The disadvantage with these assets is that if you are in a hurry and need cash urgently, illiquid assets may not be of any help. However, if you have enough time and patience to wait, till you find a buyer who is ready to pay the quoted price, or till the market condition recovers, then these assets may yield you profits. So valuing illiquid assets is also a difficult task.