What does liquidate mean?
To liquidate means to convert assets into cash or cash equivalents by selling them on the open market. Liquidation is also a term used in bankruptcy procedures in which an entity chooses or is forced by a judgment or legal contract to transform its assets into a “liquid” form (cash). In finance, an asset is an element that has value.
In the investment field, liquidation occurs when an investor decides to liquidate his position in a particular asset or security. An investor who has owned a stock for a long time may decide to sell some or all of the shares held in their portfolio for cash. Asset liquidation is usually done when an investor or portfolio manager needs cash to reallocate funds or rebalance the portfolio. An asset that does not perform well in the markets can also be partially or fully liquidated to minimize or avoid losses. An investor who needs cash to fulfill other obligations unrelated to the investment, such as paying bills, vacation costs, buying a car, tuition, etc. can choose to liquidate its assets.
Financial advisers responsible for allocating assets to a portfolio generally consider, among other factors, why the investor wishes to invest a certain amount of money and for how long the investor wishes to invest. An investor whose objective is to buy a house in five years, may have a portfolio of stocks and bonds designed with the intention of liquidating in five years. The cash proceeds would then be used to make a down payment for a home. The financial adviser will take this five-year period into account when selecting investments likely to appreciate and protect the investor’s capital.
Key points to remember
- To liquidate simply means to sell an asset for money.
- Investors can choose to liquidate an investment for a variety of reasons, including needing cash, wanting to exit a weak investment, or even simplifying the holdings of the portfolio.
- In addition to voluntary liquidation, individuals and businesses may be forced to liquidate assets through the bankruptcy process.
When companies liquidate their assets
While companies can liquidate assets to free up money, even in the absence of financial difficulties, the liquidation of assets in the business world is mainly done through bankruptcy proceedings. When a business fails to repay its creditors due to financial difficulties and prolonged losses in its business, a bankruptcy court can order a compulsory liquidation of the business assets if the business is found to be insolvent. Secured creditors would take over the collateral before the loan was approved. Unsecured creditors would be reimbursed with the liquidation money, and if any funds remain after all the creditors have been settled, the shareholders will be paid according to the proportion of shares each holds with the insolvent company.
However, not all liquidations are due to insolvency. A business can also undergo voluntary liquidation, which occurs when the shareholders of the business choose to close the business. The request for voluntary liquidation is filed by the shareholders when it is considered that the company has achieved its objectives and purpose. The shareholders appoint a liquidator who dissolves the company by collecting the assets of the solvent company, by liquidating the assets and by distributing the product to the employees to whom we owe a salary and to the creditors in order of priority. The remaining money is then distributed to the preferred shareholders before the ordinary shareholders obtain a reduction.