#Liquidity101 "Liquidity 101" is a term used to refer to the basic or introductory concept of liquidity, a central theme in finance. Here are the main points:
---
📌 What is liquidity?
1. Market liquidity – Refers to the ease with which an asset can be bought or sold without causing significant price fluctuations. Highly liquid assets, such as popular stocks and currencies, allow for quick transactions with low spreads (the difference between buy and sell prices), resulting in lower volatility.
2. Accounting (or business) liquidity – Measures a company's (or individual's) ability to quickly convert its assets into cash to meet short-term debts. Usually analyzed through liquidity ratios, such as:
Current Ratio: Current Assets ÷ Current Liabilities
Quick Ratio (or acid-test): (Current Assets – Inventories) ÷ Current Liabilities
Cash Ratio: Cash and equivalents ÷ Current Liabilities
---
Why is liquidity 101 important?
For investors, it helps to identify if you can enter or exit a position without significant loss — illiquid markets can cause price slippage and losses.
For companies, it ensures there is enough cash to pay bills, salaries, and seize opportunities, avoiding solvency crises.
---
Final summary
Liquidity = speed and cost of converting an asset into cash.
High liquidity = fast + without price drop.
Low liquidity = slow and with large price fluctuations.
Liquidity ratios help assess short-term financial health.
If you want, I can explain more about each ratio, show practical examples, or how these concepts apply to investments like stocks, real estate, or cryptocurrencies. Just let me know! 😊