#Liquidity101

Liquidity refers to how easily an asset can be converted into cash without significantly affecting its price. Cash is the most liquid asset, while things like real estate or collectibles are less liquid.

There are two main types of liquidity: market liquidity and accounting liquidity. Market liquidity looks at how easy it is to buy or sell assets in a market. High liquidity means there are many buyers and sellers, so trades happen quickly and at stable prices. Accounting liquidity refers to a company’s ability to meet its short-term obligations using its current assets.

Liquidity is important for investors and businesses. For investors, liquid assets can be sold quickly if needed. For businesses, strong liquidity means they can pay bills and avoid financial stress. Common measures of liquidity include the current ratio and quick ratio, which compare a company’s assets to its liabilities.

In short, liquidity affects how flexible and stable financial operations are. It plays a key role in daily transactions, investments, and long-term planning.