#Liquidity101
Liquidity refers to how easily an asset can be converted into cash without significantly affecting its price. In simpler terms, it's the ability to access cash quickly when needed. Among all assets, cash is considered the most liquid, while things like real estate are less liquid because they take time and effort to sell.
For a business, good liquidity means it can meet its short-term financial obligations without having to sell off its long-term or less liquid assets. This is crucial for maintaining financial stability.
There are two main types of liquidity:
1. Market Liquidity – how easily an asset can be bought or sold in the market without affecting its price.
2. Accounting Liquidity – a company’s ability to pay off its short-term debts using its liquid assets.
For example, stocks are considered highly liquid because they can be quickly sold on the stock market at or near their market value. The narrower the gap between the buying and selling price, the better the market liquidity.
In summary, liquidity is a fundamental concept in finance that reflects the health of cash flow in a business or market and is critical to long-term financial success.
