#Liquidity101

What is liquidity?

Liquidity refers to how easily and quickly an asset or security can be converted into cash without significantly affecting the market price of that asset. Simply put, it is how easy it is to sell something you own and turn it into cash.

Key aspects of liquidity:

* High liquidity: Assets with high liquidity can be converted to cash quickly and easily. Think of cash itself, or savings in a bank account. Stocks of large, well-known companies that are heavily traded and highly traded government bonds are generally considered liquid.

* Low liquidity: Assets with low liquidity are challenging and take longer to convert to cash without a substantial loss in value. Examples include real estate, rare collectibles, specialized machinery, or shares in private companies. Selling these assets may take some time, and you may have to accept a lower price than you desire.

Why is liquidity important?

* For individuals: Owning liquid assets allows you to cover unexpected expenses or seize opportunities without having to sell long-term investments at an inconvenient time.

* For companies: Companies need sufficient liquidity to pay their bills, manage operations, and invest in growth. A lack of liquidity can lead to financial distress, even if the company is profitable on paper.

* For financial markets: Liquid markets are characterized by efficiency and stability. They allow investors to buy and sell assets.