Liquidity is the ease and efficiency with which an asset or security can be converted into cash without significantly affecting its market price. Cash is considered the most liquid asset because it can be used immediately for transactions. Other assets like stocks and bonds are also liquid but may require some time to sell, while tangible assets such as real estate, collectibles, or rare items tend to be less liquid because they take longer to sell and might need to be discounted to sell quickly
. There are two main types of liquidity:
- Market liquidity : How quickly and easily an asset can be bought or sold in the market at a price close to its intrinsic value without causing a drastic price change
- Accounting liquidity : A company's or individual's ability to meet short-term financial obligations by converting assets into cash or having cash readily available
Liquidity is crucial for both individuals and businesses to pay off short-term debts and manage financial obligations efficiently. High liquidity means assets can be quickly converted to cash to cover expenses, while low liquidity might force selling assets at a loss or borrowing money
. In summary, liquidity measures how fast and easily assets can be turned into cash, impacting financial health and market stability.
