A liquid investment is any investment that can be easily converted into cash without having a significant impact on its value. Examples of liquid investments are cash, money market funds, and shares of publicly held companies that actively trade on an established stock exchange. The sum total of these investments can be aggregated and compared to a company’s short-term liabilities to see if there are sufficient liquid investments on hand to pay off the liabilities, which is a key indicator of corporate liquidity.
Investments are not considered to be liquid when it takes a significant amount of time to convert them into cash, or if the act of selling them reduces their value. For example, real estate can take a long time to sell, and so is not classified as a liquid investment. Or, the shares of a company that are thinly traded cannot be sold in bulk without causing a significant downward shift in their price, and so are also not considered to be liquid.