#Liquidity101

🔹 What Is Liquidity?

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.

• High liquidity = easy to buy/sell quickly at stable prices (e.g., cash, stocks of large companies).

• Low liquidity = harder to sell quickly without losing value (e.g., real estate, collectibles).

⸻

🔹 Types of Liquidity

1. Market Liquidity

• How easily assets can be bought or sold in a market.

• A liquid market has lots of buyers and sellers (e.g., stock market).

2. Accounting (or Balance Sheet) Liquidity

• A company’s ability to pay off short-term liabilities with its liquid assets (like cash or receivables).

3. Funding Liquidity

• A firm’s or individual’s ability to access cash or borrowing to meet obligations.

⸻

🔹 Common Liquidity Ratios

Used to measure a company’s financial health:

• Current Ratio = Current Assets / Current Liabilities

• Quick Ratio (Acid Test) = (Cash + Receivables + Marketable Securities) / Current Liabilities

• Cash Ratio = Cash / Current Liabilities

⸻

🔹 Why Liquidity Matters

• Prevents financial distress

• Enables flexibility in spending or investing

• Important for investors, businesses, and financial institutions