- The ability of the market in a particular security to absorb a reasonable amount of buying or selling reasonable price changes.
- A corporation’s current assets relative to its current liabilities; its cash position.
What is liquidity?
Liquidity refers to the ease with which an asset can be converted into cash or other liquid assets without affecting the asset’s market price. In other words, liquidity measures how quickly and at what price an asset can be sold in the market.
For example, assets such as cash, government bonds, and stocks are considered liquid because they can be easily sold and converted into cash. In contrast, real estate and private business equity are typically considered less liquid because they can take longer to sell and may have more restrictions on the sale process.
In finance and economics, liquidity is an important concept because it affects the ability of individuals, businesses, and governments to access the funds they need to meet their financial obligations. For example, a highly liquid asset can be sold quickly to generate cash in case of an emergency or to take advantage of investment opportunities.
In addition, the level of liquidity in financial markets affects the ability of market participants to buy and sell assets and can have a significant impact on market stability and the cost of borrowing. A market with high liquidity is considered to be more stable because it is easier to buy and sell assets, and the cost of borrowing is usually lower.
In summary, liquidity is a key factor in assessing the value and risk of an investment and the overall functioning of financial markets.
