#Liquidity101
Liquidity refers to how easily and quickly an asset can be converted into cash without significantly affecting its price.
Here are a few key points to understand:
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🔹 Types of Liquidity
1. Market Liquidity
How easily assets (like stocks, real estate, or bonds) can be bought or sold in a market without causing large price changes.
High liquidity: Stocks on major exchanges (like Apple shares).
Low liquidity: Rare collectibles or real estate.
2. Accounting (or Balance Sheet) Liquidity
A company’s or individual’s ability to meet short-term financial obligations using assets that can quickly be turned into cash.
Measured by ratios like:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
3. Cash Liquidity
The most liquid asset is cash, since it's already money.
🔹 Why Liquidity Matters
For investors: Higher liquidity means it's easier to enter or exit investments.
For businesses: Strong liquidity ensures a company can pay its bills and stay solvent.
For markets: High liquidity keeps pricing efficient and reduces volatility.
