What does liquidity refer to in finance?

Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its value. In financial contexts, a liquid asset is one that can be quickly sold or accessed in cash, making it an essential aspect of financial management. For example, cash itself is perfectly liquid, while real estate or collectibles may take longer to sell and may also require a discount to sell quickly.

Understanding liquidity is crucial for individuals and businesses alike, as it impacts their ability to meet short-term obligations and manage unexpected expenses. Assets with high liquidity levels, such as stocks or bonds, can be accessed quickly and with minimal costs, while assets with lower liquidity may involve a longer time frame and potentially reduced market value when sold in haste.