Are Stocks & Bonds Liquid Assets?

Government bonds are much more liquid than most corporate bonds.

Stocks and bonds are two types of investments that are fungible, which means investors are free to buy and sell them to one another at will. This does not necessarily mean that they are liquid assets, however. It would be fair to say that some stocks and some bonds are liquid, while others are not.

Liquidity

Liquidity is the measure of how easily and how quickly you can buy or sell an investment, such as stocks or bonds. For example, if a stock is currently quoted at $100 per share and you wish to sell 1,000 shares, you may not be able to sell more than just a few shares at that price if it is illiquid. It could be possible that only 50 shares are available at $100 and that, to sell all 1,000 shares, you must drop your price to find more buyers.

Liquidity of the Bond Market

The bond market is much bigger than the stock market. The total value of bonds is almost two times as much as the total value of stocks. However, the bond market is also significantly less liquid than the stock market because far more investors and traders participate in the stock market. This may not be an issue for long-term bond investors who do not need to buy and sell quickly, but it can have a significant impact on bond traders who are more active.

Liquidity of the Stock Market

Liquidity varies greatly among different companies. Trading volume for popular companies, such as Apple Computer and Johnson and Johnson, averages millions of shares per day. If you wish to buy or sell one of these companies, you can usually receive the currently quoted market price and your transaction can occur in microseconds. Meanwhile, some lesser-followed stocks might trade only a few thousand shares per day, making them much more difficult to buy and sell quickly at the price you want.

Relativity of Liquidity

While liquidity varies greatly between stocks and bonds and different stock and bond issues, both types of assets are much more liquid than many other types of investments. For example, if you invest in real estate, it can take months or years to sell it. You should always be able to sell a stock or a bond you own the day you wish to sell it, especially if you are willing to adjust the price you wish to receive.

References

• Default Risk; Corporate Yield Spreads and Bond Liquidity; Long Chen, David A. Lesmond and Jason Wei; February 2007
• Florida International University College of Business: Stock and Bond Basics