**Liquidity** refers to how quickly and easily an asset can be converted into cash **without significantly affecting its market price**. It's a core concept in finance and business, measuring the ease of buying or selling.
There are two main types:
1. **Market Liquidity:** How efficiently an asset (like stocks or bonds) trades in a market. A **liquid market** has:
* **High Trading Volume:** Many buyers/sellers.
* **Narrow Bid-Ask Spread:** Small difference between buying/selling prices.
* **Price Stability:** Large trades don't cause drastic price swings.
2. **Asset Liquidity:** How easily an individual asset converts to cash. **Cash is the most liquid asset.** Other examples:
* **High Liquidity:** Stocks of large companies, government bonds.
* **Low Liquidity:** Real estate, fine art, shares in small private companies (harder to sell quickly at fair value).
**Why it matters:** Liquidity is crucial for businesses to meet short-term obligations (like payroll), for investors to enter/exit positions easily, and for overall financial stability. Low liquidity increases risk and can force asset sales at unfavorable prices.