#Liquidity101 1. What is Liquidity?

General Definition: Liquidity means the ability to convert a financial asset (such as cash, stocks, bonds, cryptocurrencies, etc.) into cash quickly and at the lowest possible cost (in terms of the difference between the buying and selling price or commission).

Why “101”?: The number 101 is traditionally used to denote an introductory lesson or fundamentals; meaning we are here to learn the basics of liquidity.

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2. Types of Liquidity and Examples

1. Cash Liquidity

This is the simplest form of liquidity; that is, the cash in your hand or in your bank account.

Example: My balance in my bank account is “cash liquidity” that I can use immediately.

2. Market Liquidity

It relates to how easy it is to buy or sell a specific asset in the market without significantly affecting the price.

High liquidity assets: Such as stocks of major companies (like Apple or Microsoft stocks); because you can sell a large quantity of them quickly and with a small difference between the offer and demand price.

Low liquidity assets: Such as some small stocks or real estate; as selling them might take a long time or require reducing the price to find a buyer.

3. Accounting Liquidity

This is the ability of a company or individual to meet short-term financial obligations (such as bills and employee salaries) using current assets.