What is liquidity?
Liquidity is the ability of an asset to be converted into cash quickly and with minimal impact on the asset’s market price. In other words, liquidity refers to the ease with which an asset can be bought or sold in the market without affecting the price of the asset.
the availability of liquid assets to a market or company.
“the banks closed, causing serious liquidity problems for smaller companies”
- liquid assets; cash.
“a firm may be unable to pay unless it has spare liquidity”
- a high volume of activity in a market.
Merriam Webster Online
4a: consisting of or capable of ready conversion into cash
b: capable of covering current liabilities (see LIABILITY sense 2) quickly with current assets
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
- Market liquidity, the ease with which an asset can be sold
- Accounting liquidity, the ability to meet cash obligations when due
- Liquid capital, the amount of money that a firm holds
- Liquidity risk, the risk that an asset will have impaired market liquidity
Frequently Asked Questions
How Do I Know If My Investments Are Illiquid?
An illiquid investment is one where there is not enough demand to support the current supply. This means that investors cannot easily sell their shares because there aren’t enough buyers. In contrast, a liquid investment has sufficient demand to meet its supply.
What Is Liquidity of an Investment?
Liquidity is one of the three main characteristics of an investment (the others being safety and growth). It’s measured by comparing the price at which an investor would sell the security with the price at which another investor would buy it. If the difference between these two prices is large, then the security is considered highly illiquid.