#Liquidity101

What Is Liquidity?

When an asset can be efficiently converted into ready cash without affecting its market value, it is considered a liquid asset. The ability to convert it quickly and efficiently is called liquidity. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently.

The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.

Understanding Liquidity

Liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum

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Understanding Liquidity and How to Measure It

By Adam Hayes Updated May 31, 2025

Reviewed by Thomas J. Catalano

Fact checked by Yarilet Perez

Definition

Liquidity is the term used in finance to refer to how easy it is to convert an asset to cash and not affect its market price.

What Is Liquidity?

When an asset can be efficiently converted into ready cash without affecting its market value, it is considered a liquid asset. The ability to convert it quickly and efficiently is called liquidity. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently.

The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.

Key Takeaways

Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.

The two main types of liquidity are market liquidity and accounting liquidity.

Current, quick, and cash ratios are most commonly used to measure liquidity.

Liquidity.