#Liquidity101

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Liquidity

How quickly an investment can be sold without impacting its price

Written byCFI Team

Read Time3 minutes

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What is Liquidity?

In financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value or current market value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount.

In accounting and financial analysis, a company’s liquidity is a measure of how easily it can meet its short-term financial obligations.



Ranking of Market Liquidity (Example)

Below is an example of how many common investments are typically ranked in terms how quickly and easily they can be turned into cash (of course, the order may be different depending on the circumstances).

Liquidity rankings:

Cash

Foreign Currency (FX)

Guaranteed Investment Certificates (GICs)

Government Bonds

Corporate Bonds

Stocks (publicly traded)

Commodities (physical)

Real Estate

Art

Private Businesses