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Liquidity: How it Affects Investments
There are several factors that influence what assets are the best to invest in. People often choose investments that give a high expected rate of return, while others choose ones for other reasons. Investors demand for various assets are based on three main characteristics. The first is the expected return the asset provides compared with the returns provided by other assets. The second characteristic is the risk associated with the asset's expected return. The third characteristic, which this paper discusses, is the liquidity of the asset. Liquidity is a unique characteristic that describes how easy and at what cost an asset is able to be sold. It is important when investing to understand that there is inherent risk with holding assets that are more liquid, but there are also potential greater rates of return with less liquid investments. This paper will analyze liquidity in relation to various types of investments on multiple scales.
Money and Liquidity
Money is often referred to as the most liquid of assets, because it is a medium of exchange, a unit of account, a store of value, and is generally accepted for the payment of debt. A medium of exchange is an important concept with money because it eliminates having to determine the price of one good in terms of others, and all goods and services can be valued with a common unit. The other characteristics of money recognize its value in purchasing assets or lending funds. From an international point of view, money is translated into several currencies, from the dollar in the U.S. ...