#Liquidity101
🔹 What is liquidity?
Liquidity is the ease with which an asset (such as stocks or real estate) can be converted into cash quickly and without significantly affecting its price.
🔸 Types of liquidity
Market liquidity
Refers to how easily an asset can be bought or sold in the market.
Example: Apple shares can be easily bought and sold – they have high liquidity.
Accounting liquidity
The company's ability to meet its short-term obligations.
Popular ratios:
Current liquidity ratio = current assets / current liabilities
Quick liquidity ratio = (current assets - inventory) / current liabilities
Financing liquidity
Refers to how easily an individual or company can obtain cash or financing to meet obligations.
Example: A company needs a loan to pay suppliers.
🔹 High liquidity vs. Low liquidity
High liquidity
Ease and speed of buying and selling
Low trading costs
Narrow price spread between bid and ask
Low liquidity
Difficulty in selling quickly without lowering the price
High trading costs
Large gap between bid and ask prices
🔸 Examples of assets by liquidity
Asset Liquidity Level
Cash Very high
Stocks High
Real estate Low
Antiques / Artwork Very low
🔹 Why is liquidity important?
It helps investors avoid losses when selling quickly.
It enables companies to pay expenses on time.
It is very critical during times of economic crises (such as the 2008 crisis or the COVID-19 pandemic).