#Liquidity101

Here's a simple breakdown of #Liquidity101, which covers the basics of liquidity in finance and investing:

💧 What is Liquidity?

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.

🔑 Key Types of Liquidity

1. Market Liquidity

• The ability to buy or sell an asset quickly at stable prices.

• High liquidity = many buyers and sellers.

• Example: Stocks on major exchanges.

2. Accounting Liquidity

A company's ability to meet short-term obligations using its current assets.

Measured using ratios like:

• Current Ratio = Current Assets / Current Liabilities

• Quick Ratio = (Current Assets - Inventory) / Current Liabilities

3. Asset Liquidity

• How easily a specific asset can be sold.

• Cash = most liquid

• Real estate or collectibles = less liquid

📊 Why Liquidity Matters

• Investors need liquidity to exit positions quickly.

• Businesses need liquidity to pay bills, make payroll, and survive financial stress.

• Markets with high liquidity = more efficient, less volatile, tighter spreads.

🧠 Liquidity vs. Solvency

• Liquidity = short-term cash flow

• Solvency = long-term financial health

• A company can be solvent but illiquid, or liquid but insolvent.

🚨 Signs of Low Liquidity

• Large price swings with small trades

• Wide bid-ask spreads

• Difficulty executing trades at expected prices