Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. It's a fundamental concept in finance, crucial for individuals, businesses, and markets.
High liquidity means ample buyers and sellers, ensuring quick transactions, tight bid-ask spreads, and minimal price fluctuations (slippage). Cash is the most liquid asset, followed by marketable securities like actively traded stocks and bonds.
Conversely, low liquidity implies fewer participants, leading to wider spreads and greater price volatility. This can be risky for large trades but may offer opportunities for early investors in new or niche assets. Understanding liquidity is vital for managing financial health, making investment decisions, and ensuring efficient market operations.