1. The preference for holding assets that can most easily be turned into cash. Assets can differ in their degree of liquidity. For example, common stock in a large established company that trades on a major exchange will be highly liquid. In contrast, bonds issued to finance a speculative investment project in a less developed country may not be traded on any organized market, so are much less liquid than the stock. Assets that are less liquid must offer a higher expected return in order to induce investors to hold them.

2. The factors determining the demand for money.