Liquidate: What Is It?
Liquidate refers to the process of selling real estate or other assets on the open market in order to convert them into cash or cash equivalents. Similar to closure, liquidation is the process of dividing up a company’s assets among claimants.
Read More: Liquidation Stock
Asset liquidations can occur voluntarily or involuntarily. To raise the funds required for fresh investments or acquisitions, or to close down existing holdings, voluntary liquidation may be implemented. When an entity decides to convert assets into a liquid form (i.e., cash) or is compelled to do so by a court order or contract, this process is known as a forced liquidation and can be applied in bankruptcy operations.
The process of selling off goods, typically at substantial discounts, is sometimes referred to as liquidation. A corporation may decide to liquidate inventory to make room for fresh things, thus filing for bankruptcy is not necessarily required.
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Knowing How to Liquidate
When an investor sells their investment in an asset, it’s known as liquidation in the investing world. When a portfolio manager or investor needs cash to reallocate money or rebalance a portfolio, they often liquidate an asset. A poorly performing asset may also be liquidated whole or in part. An investor may choose to sell their assets if they require money for other non-investment-related reasons like bill payment, travel expenses, automobile purchase, tuition, etc.
When assigning assets to a portfolio, financial advisers often take into account an investor’s investment goals and time horizon. A portfolio of stocks and bonds intended for liquidation within five years can be held by an investor hoping to purchase a house within that time frame. A down payment on a house would then be made with the cash proceeds. When choosing assets that are expected to increase in value and safeguard the investor’s wealth, the financial advisor would have that five-year deadline in mind.
Calls for Margin
In the case of an unfulfilled margin call, brokers have the right to require some clients to sell their securities. This is a request for more cash made when investment losses cause the value of a margin account to drop below a threshold set by their broker.
A broker may liquidate any open trades to restore the account to the minimum amount if a margin call is not satisfied. Without the investor’s consent, they might be able to do this. This essentially means that any stock holdings may be sold by the broker in the required quantities without informing the investor.
Moreover, a commission may be assessed by the broker to the investor on these transaction(s). For any losses incurred throughout this procedure, this investor is liable.
When Businesses Sell Their Assets
In the business sector, asset liquidation is typically done as part of a bankruptcy proceeding, however companies can still sell assets to raise cash even when they are not experiencing financial difficulties. If a business is deemed to be insolvent after failing to pay creditors because of financial difficulties, the bankruptcy court may mandate an orderly asset sale.
The assets pledged as collateral prior to loan approval would be acquired by the secured creditors. The money left over after liquidation would be distributed to the unsecured creditors. The shareholders will get payment based on the percentage of shares each owns in the bankrupt firm, provided there are any remaining cash after all creditors have been paid.
Insolvency is not always the cause of liquidation. Voluntary liquidation is the process by which a corporation goes through when its shareholders decide to close it down. When shareholders feel that the firm has fulfilled its objectives, they submit a petition for voluntary liquidation. The company’s assets are gathered by the shareholders, who choose a liquidation. The liquidator then proceeds to sell the assets, allocating the revenues to creditors and workers according to priority.
The Final Word
Liquidate is to sell an asset(s) for cash, usually very fast. One can choose to liquidate voluntarily in order to reduce risk or boost their cash position, or they can be ordered to do so by a court in the event of bankruptcy or by a margin call in a brokerage account. Since currency is by definition the most liquid asset in existence, the word “liquidation” originates from this fact.
