Liquidate: Definition and How the Process Works

Key takeaways

• To liquidate means converting assets into cash, typically by selling them on the open market.
• Liquidation can be voluntary (to raise cash or wind down a business) or forced (by a broker’s margin call or a bankruptcy proceeding).
• In bankruptcy liquidations, creditors are paid first, then preferred shareholders, and common shareholders last—often receiving little or nothing.

What “liquidate” means

Liquidate refers to turning property or other assets into cash or cash equivalents. In business contexts it also describes winding down operations and distributing the proceeds to creditors and shareholders. Liquidation can involve selling inventory at discounts, disposing of investments, or selling fixed assets.

Why liquidation happens

Common reasons include:
* Raising cash for new investments, purchases, or personal needs.
Rebalancing or closing underperforming investment positions.
Meeting a broker’s margin call when a margin account falls below required levels.
* Dissolving a company that is insolvent, insolvent-ish, or voluntarily winding down.

Liquidation in investing

When an investor liquidates a position, they sell holdings to free up cash or reduce exposure. Financial advisors consider time horizons and liquidity needs when building portfolios so that planned liquidations (e.g., for a home down payment) can occur on schedule without undue loss.

Margin calls and forced liquidation

If a margin account’s value drops below the broker’s maintenance requirement, the broker may issue a margin call requesting additional funds. If the investor does not meet the call, the broker can sell (liquidate) positions—sometimes without prior approval—to restore minimum equity. Investors are responsible for losses and any transaction costs from those sales.

Company liquidation: voluntary vs. compulsory

Businesses may liquidate assets for routine or strategic reasons, but most large-scale liquidations occur during bankruptcy:

Voluntary liquidation
* Initiated by shareholders when they decide to wind down a solvent company.
* A liquidator is appointed to collect and sell assets and distribute proceeds according to priority.

Compulsory (bankruptcy) liquidation
* Ordered when a company is insolvent and cannot meet creditor claims.
* Secured creditors reclaim collateral first; remaining proceeds pay unsecured creditors; any leftover funds go to preferred and then common shareholders.

In the United States, Chapter 7 of the Bankruptcy Code governs liquidation proceedings.

Effects on employees and shareholders

• Employees typically lose their jobs but can often claim unpaid wages and benefits from liquidation proceeds; unemployment benefits may also be available.
• Creditors are paid before shareholders. Preferred shareholders have priority over common shareholders, who frequently recover little or nothing after liquidation.

Individuals liquidating assets

Individuals may sell property, securities, collectibles, or personal items to raise cash for debt repayment, major purchases, emergency expenses, divorce settlements, or other obligations. Securities in margin accounts can also be forcibly liquidated if margin calls are unmet.

Origin of the term

“Liquidate” derives from Latin liquidus (“fluid” or “melting”), metaphorically referring to converting less-liquid assets into cash—the most liquid asset.

Bottom line

Liquidation is the conversion of assets into cash and can be a voluntary financial strategy or a forced outcome of margin calls or bankruptcy. In business liquidations, legal rules determine the order of payments, and liquidation usually ends operations and dissolves the company.