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Liquid vs marketability of asset

Discussion in 'SP5' started by i-actuary, Mar 25, 2020.

  1. i-actuary

    i-actuary Keen member

    I hope you all being alright .
    I am having difficulties in finding a definition of liquidity and marketability of an asset.
    In many of the exams’ answers these two are highly interrelated and this confuses me.
    Thank you
     
    i-actuary, Mar 25, 2020
    #1
  2. Simon James

    Simon James ActEd Tutor Staff Member

    Hi.

    My house is very marketable (I reckon I could easily find a buyer who wants to buy it).

    But my house is not very liquid - it would takes months for me to actually sell it and convert that asset into cash.

    Any help?
    Simon
     
    Simon James, Mar 25, 2020
    #2
  3. Studystuff

    Studystuff Keen member

    I’ve been struggling with this concept too and the terms seem to be used very loosely and interchangeably at times.

    What’s helped me the most is that from what I can see Marketability is the ease of being able to find a buyer and sell the asset (without making any statement about price)

    Whereas liquidity is being able to sell your asset immediately at a stable market price.

    Example: Short term Goverment bonds are marketable but they are also stable as they are not very volatile in price and price doesn’t have to be lowered to find a buyer.

    equities: An equity market may be marketable as there are lots of buyers and sellers however equity values are very volatile so it cannot be seen as liquid due to the lack of stable market prices.

    can someone correct me if I’m wrong ?
     
    Studystuff, Mar 25, 2020
    #3
  4. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    I agree that the two concepts are very close - indeed in later subjects such as SA7 they are almost always used interchangeably. I havent seen an incident in SP5 where the difference between the terms has been of any great relevance to be honest. But Simon's example above demonstrates the difference. Liquidity is about the ease with which it can be changed into cash, or indeed mature into cash. So a short term treasury bill is liquid as it will turn into cash on its own very soon, and it can be sold tomorrow for cash with no reduction in price. Equities are marketable in most cases, but the price that you can get is unclear. And equities certainly will not mature into cash any time soon. Some houses are marketable but not liquid. Many houses are neither marketable nor liquid.
     
    Colin McKee, Mar 25, 2020
    #4
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  5. i-actuary

    i-actuary Keen member

    Can it be marketable (so find easy a buyer) but illiquid at the same time ?
     
    i-actuary, Mar 25, 2020
    #5
  6. i-actuary

    i-actuary Keen member

    Thank u all. And i thought i had not studied so far and that why i couldnt spot the difference...
     
    i-actuary, Mar 25, 2020
    #6

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