In finance, what does the term "liquidity" refer to?

Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its market price. In the context of finance, an asset is considered liquid if it can be sold quickly in the market, as cash is the most liquid asset of all. For instance, stocks are generally more liquid than real estate because stocks can be sold rapidly on an exchange, whereas selling real estate usually takes much longer and may involve higher transaction costs or market price fluctuations.

The concept of liquidity is crucial for individuals and businesses as it impacts their ability to meet short-term obligations. High liquidity indicates that a firm or individual can access cash swiftly when needed, which is important for maintaining operations and addressing unexpected expenses. Understanding liquidity helps assess whether an investment can quickly be sold and how ready an individual or business is to handle its financial responsibilities.