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Term Definition

The ease with which an asset can be converted into cash without significant loss in value. 

Liquidity has different meanings depending on the context, but generally refers to the ease with which an asset can be converted into cash without affecting its price. Here are some key points to understand its meaning:

In finance:

  • Market liquidity: Refers to how quickly and easily an asset can be bought or sold in a market without significantly impacting its price. Highly liquid assets like stocks and bonds trade frequently with many buyers and sellers, while illiquid assets like real estate or collectibles may take longer to sell and often require specialized markets.
  • Individual or company liquidity: Refers to the ability to meet short-term financial obligations. Businesses need enough liquid assets like cash or marketable securities to cover expenses and debts. Personal financial liquidity relates to having readily available funds for emergencies or unexpected expenses.

Other contexts:

  • Real estate: Refers to how quickly and easily a property can be sold. Factors like location, demand, and property type influence liquidity.
  • Economics: Refers to the ease with which goods and services can be bought and sold in a market. A liquid economy has efficient markets with readily available goods and services.

Here are some additional points to remember about liquidity:

  • Liquidity is a spectrum: Assets can range from highly liquid (cash) to very illiquid (unique collectibles).
  • Liquidity can change: Market conditions, regulations, and individual circumstances can affect liquidity.
  • Liquidity is important: Both individuals and businesses need some level of liquidity for financial flexibility and stability.