#Liquidity101

Liquidity refers to how easily and quickly an asset can be converted into cash without significantly affecting its value. Cash is the most liquid asset because it’s readily available for transactions. On the other hand, assets like real estate, fine art, or certain investments are considered illiquid because they take time to sell and may lose value in the process.

There are two types of liquidity: market liquidity and accounting liquidity. Market liquidity describes how easily assets can be bought or sold in a market without causing a drastic price change. Accounting liquidity measures a company’s ability to pay off its short-term liabilities with its current assets.

High liquidity is essential for both individuals and businesses. For individuals, it means being able to handle emergencies or unexpected expenses. For businesses, strong liquidity ensures smooth operations and financial stability. Managing liquidity wisely helps prevent cash flow problems and supports long-term financial health.