Fine wine is an intriguing investment class. Sometimes it does other types of assets, yet sometimes it . Either way, it carries a level of ‘illiquidity risk’ because wine is not a particularly ‘liquid’ asset. That isn’t due to the risk of the wine being corked when you open the bottle, but because it must be stored for a certain amount of time and typically is sold to a specific set of buyers. Fine wine is not liquid because you can’t readily sell it.

“Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price,” according to . “The two main types of liquidity are market liquidity and accounting liquidity.”

Market liquidity

“Market liquidity is the liquidity of an asset and how quickly it can be turned into cash. In effect, how marketable it is, at prices that are stable and transparent,” explained. “High market liquidity means that there is a high supply and a high demand for an asset and that there will always be sellers and buyers for that asset. If someone wants to sell an asset yet there is no one to buy it, then it cannot be liquid.”

In the stock market, “liquidity generally refers to how rapidly shares of a stock can be bought or sold without substantially impacting the stock price,” noted the . “Stocks with low liquidity may be difficult to sell and may cause you to take a bigger loss if you cannot sell the shares when you want to.”

“Liquidity risk is the risk that investors won’t find a market for their securities, which may prevent them from buying or selling when they want,” per the SEC.

“Smaller-cap companies, which are traded on smaller exchanges more infrequently than larger-cap companies, usually have higher liquidity risk,” stated .

Accounting liquidity

Accounting liquidity is a company’s (or a person’s) capability to pay their financial obligations, generally within the coming 12 months. Business Insider said: “High liquidity ratios indicate a company is on a strong financial footing to pay its debt. Low liquidity ratios indicate that a company has a higher likelihood of defaulting on debts, particularly if there’s a downturn in its specific market or the overall economy.”

Why it matters

“All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount,” commented the .

“Liquid investments can be sold readily and without paying a hefty fee to get money when it is needed,” said the SEC. Some investment products, such as fixed-term deposits and certain investment funds, “charge a penalty for early withdrawal or liquidation”.

Cash and foreign currency are totally liquid: as the CFI observed, “it’s already cash!” Stocks, bonds and money market funds are pretty liquid, as investors normally can convert them to cash within a few days. “Slower-to-sell investments such as real estate, art, and private businesses may take much longer to convert to cash (often months or even years).”

Investors should take the need for liquidity, including for future plans, into account when making investment decisions. Locking up cash in a highly illiquid asset may bring nice long-term yields, but may not be wise for someone intending to make a down payment on property in a few months. An enticing bouquet should not hide a bad aftertaste.