While businesses can liquidate assets to free up cash even in the absence of financial hardship, asset liquidation in the business world is mostly done as part of a bankruptcy procedure.
A broker may forcibly liquidate a trader’s positions if the trader’s portfolio has fallen below the margin requirement or she has demonstrated a reckless approach to risk-taking.
Any cash that remains is then distributed to preferred shareholders, if any, before common shareholders get a cut.
In finance and economics, liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. Bankruptcy Code governs liquidation proceedings; solvent companies can also file for Chapter 7, but this is uncommon.
A portfolio comprised of stocks and bonds for an investor whose objective is to purchase a home five years from now, may have these securities liquidated in five years.
The cash proceeds would then be used to make a down payment for a home.