#Liquidity101
"Liquidity 101" typically refers to an introductory explanation of liquidity, a key financial concept. Here's a simple breakdown:
š§ Liquidity 101: The Basics
š¹ What is Liquidity?
Liquidity is how quickly and easily an asset can be converted into cash without significantly affecting its price.
High liquidity: Easily converted to cash (e.g., stocks, money market instruments, cash itself).
Low liquidity: Hard to sell quickly without loss in value (e.g., real estate, art, collectibles).
š¹ Types of Liquidity
Market Liquidity
Refers to the ease with which assets can be bought or sold in a market.
A market is liquid when there are lots of buyers and sellers and prices are stable.
Accounting (or Balance Sheet) Liquidity
Measures a company's ability to pay off short-term liabilities with its current assets.
Common ratios:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Funding (or Cash Flow) Liquidity
A firmās ability to meet its short-term obligations using available cash or easily accessible funds.
š¹ Why Liquidity Matters
For individuals: You want access to cash in emergencies. Highly liquid assets (like savings) are key.
For companies: Liquidity ensures operations continue smoothly, bills get paid, and opportunities can be seized.
For markets: High liquidity reduces transaction costs and volatility.
š¹ Examples of Liquid vs Illiquid Assets
Liquid Assets Illiquid Assets
Cash Real estate
Publicly traded stocks Private business equity
Money market funds Art, collectibles
Treasury bills Machinery
