Sure! Here's a beginner-friendly breakdown of Liquidity 101 — the fundamentals of liquidity in finance and investing:

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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 easy it is to buy or sell an asset in the market.

Example: Stocks on a major exchange (like Apple or Microsoft) are highly liquid.

Illiquid Example: Real estate or collectibles.

2. Accounting Liquidity

A company’s ability to meet short-term financial obligations.

Measured using ratios like:

Current Ratio = Current Assets / Current Liabilities

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

3. Funding Liquidity

A firm or individual's ability to raise cash when needed.

Important for banks and financial institutions.

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🔹 Why Liquidity Matters

For investors: High liquidity means easier entry and exit from positions.

For businesses: Strong liquidity means lower risk of insolvency.

In markets: More liquidity = tighter spreads, less volatility.

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🔹 Liquidity Examples