#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 sell at market value (e.g., cash, stocks of major companies).

Low liquidity: Harder to sell quickly or without a discount (e.g., real estate, collectibles).

---

🔹 Types of Liquidity

1. Market Liquidity: How easily assets are bought/sold in a market.

2. Accounting Liquidity: A company’s ability to meet short-term obligations using liquid assets.

---

🔹 Why Liquidity Matters

For individuals: Determines how fast you can access funds in an emergency.

For businesses: Affects ability to pay bills, salaries, and operate smoothly.

For investors: Impacts risk and how quickly positions can be exited.

---

🔹 Examples of Liquid Assets

Asset Liquidity Level

Cash Very High

Checking account Very High

Stocks High

Mutual funds High

Real estate Low

Artwork Very Low

---

🔹 Key Ratios to Measure Liquidity

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Cash Ratio = Cash & Equivalents / Current Liabilities

---

🔹 Quick Tips

Keep some assets in liquid form (e.g., emergency fund).

High returns often come with low liquidity – balance both.

Businesses should monitor liquidity to avoid insolvency.

---