What is liquidity?

In economics, liquidity refers to the amount of cash, cash equivalents or other assets that can be converted into cash without difficulty. Money, or cash, is the most liquid asset out there. It can be easily exchanged for goods and services with no loss of value.

In market terms, market liquidity is the ease with which assets are bought and sold without volatile shifts in price. For example, a country’s real estate market liquidity refers to the degree with which properties can be bought and sold at stable prices. Big stockmarkets, such as those measured by the FTSE 100 or Dow Jones Industrial Average indices, are considered very liquid as millions of shares are traded daily, whereas for smaller stocks it might be difficult sometimes to find buyers without cutting the price and taking heavy losses.

A given asset will be more or less liquid depending on its ability to be sold quickly without a significant reduction of its price. Business liquidity refers to the amount of liquid assets and the ability of a business to meet its payment obligations.

When an asset is exchanged for a more liquid one, the process is called liquidation, e.g. selling a car for cash.

Accounting liquidity refers to the ability of a person, country or a company to pay off debts and liabilities as they come due.

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Category: Financial Glossary

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