What is Liquidate?
Liquidate refers to turning assets into cash or cash equivalents by selling them on the open market. Liquidate is also a term used in bankruptcy proceedings in which a person decides to turn assets into a "liquid" form (cash) or is compelled by a legal decision or contract. In finance, an asset is a value-added element.
Breaking Down Liquidation
Liquidation happens in the investment market when an investor wants to close his or her place in a specific asset or securities. An investor who is a stock long can decide to sell some or all of the shares held for cash in his portfolio.
The liquidation of an asset is generally performed when the cash is required by an investor or portfolio manager to re-allocate funds or rebalance the portfolio. An asset that does not perform well in the markets can also be partially or entirely liquidated to reduce or avoid losses.
An investor who needs cash to meet other non-investment obligations, such as bill payments, holiday expenses, purchase of a vehicle, tuition fees, etc. can opt to liquidate his assets.
Financial advisors responsible for asset allocation to a portfolio typically weigh, among other things, whether the investor wants to invest a certain sum of money and how long the investor wants to invest.
An investor whose aim is to buy a home in five years may have a portfolio of stocks and bonds planned to liquidate in five years. He would then use the cash proceeds to make a down payment for a home.
The financial advisor must keep the 5-year deadline in mind when choosing investments that are likely to appreciate and protect the investor's money.
