Liquidity refers to the speed and ease with which an asset can be converted into cash without affecting its market price. Cash is the most liquid asset, while things like real estate or collectibles are considered illiquid as they require time and effort to sell. In financial markets, liquidity also describes the ease with which securities can be bought or sold. High liquidity means there are many buyers and sellers, resulting in tight spreads between bid and ask prices and minimal price fluctuations. Low liquidity can lead to price volatility and difficulties in executing transactions. For companies, liquidity indicates the ability to meet short-term obligations, typically measured by ratios such as the current ratio or quick ratio. In summary, liquidity is crucial for individual investors and organizations to manage risks and ensure flexibility.
