#Liquidity101

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price. Cash is the most liquid asset, while real estate, collectibles, and certain investments are considered illiquid because they take longer to sell and may require price reductions to find a buyer.

In financial markets, liquidity also describes the ability to buy or sell assets—like stocks or bonds—without causing sharp price movements. A highly liquid market has many buyers and sellers, tight bid-ask spreads, and high trading volumes. For example, large-cap stocks like Apple or Microsoft are extremely liquid due to frequent trading.

For businesses, liquidity measures how easily they can meet short-term obligations using assets such as cash, receivables, or inventory. Common ratios include the current ratio and quick ratio, which compare short-term assets to liabilities.

Maintaining good liquidity is crucial for financial stability. It ensures individuals, businesses, and markets can respond to unexpected needs or opportunities without suffering major losses.