#Liquidity101 Liquidity refers to how easily and quickly an asset can be converted into cash without significantly affecting its price.

Key Points:

1. High Liquidity: Assets that can be quickly sold or converted to cash with minimal loss of value.

Examples: Cash, stocks of major companies, government bonds.

2. Low Liquidity: Assets that take longer to sell and may require a price discount.

Examples: Real estate, collectibles, private equity.

3. Market Liquidity vs. Accounting Liquidity:

Market Liquidity: The ease with which an asset can be traded in the market.

Accounting Liquidity: A company’s ability to meet short-term obligations using its current assets (measured by ratios like the current ratio or quick ratio).

4. Importance:

For individuals: High liquidity provides flexibility in managing finances and emergencies.

For businesses: Strong liquidity ensures they can cover short-term liabilities and avoid solvency issues.

For markets: Liquid markets are more stable and efficient, with tighter bid-ask spreads.