Liquidity

Liquidity describes how easily you can convert an investment into cash without taking a significant loss on the price. A highly liquid investment can be sold quickly at or near its current market value. An illiquid investment might take time to sell, or you might have to accept a lower price to get rid of it.

Examples

Cash is the most liquid asset there is. Stocks and popular ETFs that trade on major exchanges are also highly liquid. You can sell them during market hours and have the cash settled in your account within a day or two.

On the other end of the spectrum, real estate is illiquid. Selling a property takes weeks or months, involves significant costs, and the price depends on finding a willing buyer. GICs can also be illiquid if they’re locked in for a fixed term, since cashing out early may come with penalties or may not be possible at all.

Why it matters

Liquidity matters most when you need your money. If you have an emergency and all your savings are locked in a 5-year GIC or tied up in property, you could be stuck. That’s why financial planning often includes keeping some portion of your money in liquid assets, like a savings account or easily sellable investments.

For everyday investors, liquidity is rarely a problem with major stocks and ETFs. Where it can catch you off guard is with thinly traded securities (small companies or niche ETFs with low volume), where the gap between the buying price and selling price can be wider than expected. That gap is called the bid-ask spread, and it’s essentially a hidden cost of trading less liquid investments.

A concrete example

You hold $5,000 in a popular ETF like XEQT and need cash for an emergency. You can sell during market hours and have the money settled in your account within two business days. Compare that to $5,000 locked in a non-cashable 3-year GIC. You can’t access it at all until the term ends, no matter how urgently you need it.