All hail King Cash!
Cash is often crowned King (with perhaps the longest reign in modern history), and rightfully so, as it’s a resource that typically upholds its value and allows you to instantly perform economic actions, such as purchasing things that you both want and need.
When you’ve funneled this royal resource into an investment, it’s wise to know how easily you can extract your cash if necessary. This is referred to as liquidity.
The term liquidity represents how easily you can convert any form of investment into cash to be used at your disposal. Some forms of investment are highly liquid, while others have far less liquidity. This is often determined by certain regulations and processes required.
There are many advantages to having cash on-hand – such as having funds accessible for an emergency, the ability to capitalize on timely investment opportunities, and even limiting your exposure to market volatility. When you have money tied to investments that are effected by the state of the economy, it can provide a peace of mind to know you have money set aside that won’t depreciate if your investments go into a decline – or that you can pull your money out of your investments within a reasonable timeframe.
Everyone’s motives for having cash readily available may be different and may vary over time, but in order to allocate your funds accordingly, you’ll need to know which investment vehicles offer the most and least liquidity.
Cashing in Quickly
Aside from having actual dollar bills tucked away in a wallet, purse or any other personal place for safekeeping, an Interest Checking Account and Money Market Account are two of the most liquid places that you can stash your precious currency. The reason being is that they both typically come with checks and debit cards, providing you with nearly instant access. In close comparison, an Online Savings Account also provides a high level of liquidity, with a few key differences. Although you can’t directly withdraw from a savings account, you can, however, perform an allotted amount of free transfers (per statement cycle) to one of the previously mentioned accounts for quicker access – while letting your money work smarter for you in the meantime with tools such as savings buckets and boosters.
A Certificate of Deposit (CD) is another great interest-bearing investment account that allows you to withdraw your cash easily. Just keep in mind that most CDs will come with an early withdrawal penalty charge if you choose to withdraw your funds before the maturity date (aka the final repayment date). A good alternative solution is a No Penalty CD, which allows you to still enjoy competitive interest rates and withdraw your full balance any time after the first six days of funding your CD, penalty-free.
Gauging the Liquidity of Investment Trading Accounts
Investment trading accounts, like an Ally Invest Self-Directed Trading Account, allows you to purchase or sell securities (a financial instrument – such as stocks – traded on a public exchange) or simply trade different forms of currency. The amount of liquidity for any type of investment you’d like to trade would depend on the market and the demand. For example, the Foreign Exchange (Forex) Market is the world’s most traded market, trading 24 hours a day and circulating roughly $5 trillion a day – thus, with such a large number of trades being executed around-the-clock, it essentially offers the highest amount of liquidity (particularly when trading major currencies like the U.S. Dollar) because there’s a high probability that there’s a counterpart actively interested in your trade at any given time. If the stock market is your preferred kingdom, however, then don’t fret because stocks can be highly liquid as well, depending on the amount of volume they attract. Volume is a technical term that represents the number of shares being traded. Many reputable publications, such as The Wall Street Journal, provide data for trading volume. For day traders, liquidity is a vital component, as they seek to get in and out of investments in a very short period of time; but even if you’re investing long-term, liquidity should be taken into account because you never know when you may want to exit a position and reclaim the cash value amount of your investment.
If you’d like to perform your due diligence and manage your trades yourself, you can open a Self-Directed Trading Account and check the volume of any prospective stock – or purchase other securities such as bonds, options, ETFs or mutual funds. At Ally Invest, we offer a Managed Portfolio as well, if you’d rather consult with our investing experts and have them position you in sound investments that are likely to maintain high liquidity.
A tradable investment that is not traded on a public exchange is considered a non-security. A non-security (an investment in which you also claim ownership – usually of a physical product or operation) typically yields the least amount of liquidity. This can include a business, real estate, and even collectible items. The reason is that it can take several steps to sell these forms of investments, which adds to the amount of time it will take to receive any cash in exchange.
Choosing Your Liquidity
The good news is that you have plenty of investment options to choose from when factoring in liquidity. A good rule of thumb is to diversify your portfolio and always allocate your funds based on your individual preference, risk tolerance and personal goals.
Ally provides plenty of resources to help you begin storing your cash in investments that provide accessibility to your liking. Because, we know that when financial turbulence is on the horizon, we often need to rely on the king (cash) to help bring about order.
CTA: Open a Self-Directed Trading Account or Managed Portfolio to begin exploring your investment options.