Liquidity 101 refers to the basic principles and understanding of liquidity—a key concept in finance and economics. Here’s a simple breakdown:

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🧾 What is Liquidity?

Liquidity is the ease with which an asset can be quickly 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 a market.

Example: Stocks of large companies are highly liquid; real estate is less liquid.

2. Accounting Liquidity

A company's ability to meet its short-term obligations.

Measured using ratios (e.g., Current Ratio, Quick Ratio).

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💰 Examples of Liquid & Illiquid Assets

Highly Liquid Moderately Liquid Illiquid

Cash Stocks Real Estate

Bank deposits Mutual Funds Private Equity

Treasury bills Corporate Bonds Art/Collectibles

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📊 Key Liquidity Ratios

1. Current Ratio = Current Assets / Current Liabilities

Measures short-term financial health.

2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities

A more stringent liquidity test.

3. Cash Ratio = Cash / Current Liabilities

Measures ability to pay with only cash.

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🧠 Why Liquidity Matters

For Individuals: Easy access to funds in emergencies.

For Businesses: Meeting payroll, paying suppliers, avoiding insolvency.

For Investors: Ability to exit positions without large price drops.

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🚨 Liquidity Risk

The risk that an asset or firm cannot be sold or funded quickly enough to prevent a loss.

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