Illiquid Assets: Overview, Risk and Examples

Especially considering the multi trillion dollar stimulus packages and historically low interest rates. Savvy New Canadians is one of Canada’s top personal thinkmarkets review finance platforms. Millions of Canadians use our site each year to learn how to save for retirement, invest smartly, maximize rewards, and earn extra cash.

Baggio holds a Bachelor of Arts degree from the University of British Columbia and a Master of Public Administration Degree from the University of Victoria. These are not exactly the same thing as option contracts on the stock market, although they do operate in a similar manner. Stock options are usually provided by companies to their employees as a method of compensation. Precious metals like gold, silver, and bronze have been used as investments and trading assets for thousands of years. Industrial real estate is also considered a good defensive, countercyclical investment.

Real estate and fine antiques are examples of illiquid financial assets. The liquidity risk mentioned earlier is a reason why illiquid assets are more risky than liquid ones. When the economy is struggling, it will likely be difficult to find a buyer for a collectible car or rare piece of art.

1. New construction on single-family homes could exceed 1 million this year.
2. It may also take an unforeseeably long amount of time to collect payment from a delinquent client.
3. For companies that are not yet profitable and re-investing their revenues, stock-based compensation through options is a popular form of payment.

This is a slight bump in the price to account for the potential of not being able to sell the asset in the future. In this scenario, there is a high chance you will lose money on the investment by selling it below market value. On the other hand, illiquid investments are ones that require some extra effort to exchange. Often where the fair market price is not easily determined or a combination of both. Financial advisors recommend against investing your entire net worth in illiquid assets.

These can be great investments during periods when interest rates are high, and equities are volatile. There is little risk involved with GICs as you are guaranteed interest payments and the return of your initial investment at the end of the term. Private equity firms acquire other mature companies to increase their value and re-sell them in the future. If you want to invest in private equity, expect your capital to be tied up for years. Once again, a significant number of collectible assets have a high price tag due to their rarity and authenticity. Are you looking to learn more about commercial real estate investments but don’t know how to get started?

Why Invest in Illiquid Assets? Illiquidity and Higher Risk

They are ideal for people who want to hold an investment over the long term. Some examples of inherently illiquid assets include houses and other real estate, cars, antiques, private company interests and some types of debt instruments. Certain collectibles and art pieces are often illiquid assets as well. Money market accounts usually do not have hold restrictions or lockup periods (i.e. you are not permitted to sell holdings for a specific period of time).

What is an Illiquid Asset

However, should business slow in a recession or any event above occurs, inventory may not be as liquid. By their nature, the benefits of long-term assets aren’t generally recognized within the next 12 months. Mutual funds are also extremely liquid and can be sold for cash immediately. Like with stocks, mutual funds usually need to be sold during the hours that the market is open.

Pros and Cons of Highly Liquid Financial Assets

Maintaining some liquidity will give you easy access to cash to cover emergency expenses like car repairs or hospital bills. Maintaining liquidity helps you avoid selling illiquid assets at a loss or taking on debt to pay your bills if you’re unable to sell the assets right away. Illiquid assets are ones that cannot be quickly or easily converted into prtrend cash for their fair market value, like ancient musical instruments or paintings. They tend to be assets that are more unusual or for which there are fewer buyers. While they are not necessarily less valuable than liquid assets, and are often far more valuable, they can be harder to “spend” at need and exist on a different part of the balance sheet.

How Do Illiquid Investments Work?

The potential for massive rewards is also there, which makes this an enticing risk/reward asset class for wealthier investors. You may be ban from selling, or only allowed to sell at specified times. Most likely at a discount too because there avatrade review are no secondary markets for these types of illiquid investments. Some people invest in collectibles like art, baseball cards, or antique cars. These are all considered illiquid assets because there’s no centralized market of ready buyers.