#Liquidity101
#Liquidity101 – Here's a simple breakdown of what "liquidity" means in finance:
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🔍 What is Liquidity?
Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.
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💸 Types of Liquidity
1. Market Liquidity: How easily assets can be bought/sold in the market (e.g., stocks, real estate).
2. Accounting Liquidity: A company's ability to pay off its short-term liabilities with its short-term assets.
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💰 Examples of Liquid vs. Illiquid Assets
Liquid Assets Illiquid Assets
Cash Real estate
Bank deposits Private equity
Stocks Artwork/collectibles
Government bonds Machinery
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📊 Key Liquidity Ratios
Used to assess a business's financial health:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Cash Ratio = Cash & Equivalents / Current Liabilities
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🚨 Why Liquidity Matters
Ensures businesses can meet obligations.
Reduces risk in financial markets.
Influences interest rates and monetary policy.
Affects investment strategies and portfolio management.
