#Liquidity101 Liquidity 101 – Everything You Need to Know Simply and Professionally

Liquidity is a term widely used in the world of finance and accounting, but it is often misunderstood or reduced to superficial concepts. Here’s a full explanation, step by step, in a direct and practical style:

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✅ What is Liquidity?

Liquidity = the ability to convert assets into cash easily, quickly, and without significant loss in value.

This means:

When you have an asset (like merchandise, real estate, or a stock), liquidity measures how easily you can convert that asset into cash.

Cash itself is the most liquid asset because it is ready for spending or payment immediately.

The less easily an asset can be converted to cash, the lower the liquidity.

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🔄 Types of Liquidity

1. Cash Liquidity

Do you have enough cash to cover your short-term obligations?

Includes: cash on hand, checking accounts, bank balances available immediately.

2. Market Liquidity

Can assets be sold in the market quickly and at a fair price?

Example: Stocks in an active exchange = high liquidity, land in a remote village = low liquidity.

3. Accounting Liquidity

The company’s ability to meet its short-term obligations using its current assets.

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