#Liquidity101

**Liquidity 101**

Liquidity refers to how easily an asset can be converted into cash without affecting its market price. High liquidity means an asset can be sold quickly with minimal price impact (e.g., stocks, forex). Low liquidity indicates slower sales or potential price discounts (e.g., real estate, rare collectibles).

**Why It Matters:**

- **Markets:** Liquid markets (like major currency pairs) have tight bid-ask spreads and high trading volumes.

- **Investors:** Ensures flexibility to enter/exit positions. Illiquid assets may trap capital.

- **Businesses:** Companies need liquid assets (cash, receivables) to cover short-term obligations.

**Measuring Liquidity:**

- **Current Ratio:** Current assets ÷ current liabilities (healthy if >1).

- **Bid-Ask Spread:** Narrower spreads mean higher liquidity.

**Risks:** Illiquidity can lead to solvency issues or fire sales during crises. Central banks often act as liquidity providers in financial systems.

In short, liquidity keeps markets and economies functioning smoothly.