liquiditymeaning

Liquidity is the ease with which an asset can be bought or sold quickly at a price close to its market value. In finance, liquidity encompasses both how easily an asset can be converted to cash and how quickly cash can be obtained to meet obligations. There are two related concepts: asset liquidity and funding liquidity. Asset liquidity refers to how readily an asset can be sold without substantial price impact; funding liquidity refers to the ability of an individual or institution to obtain cash to meet payment obligations as they come due.

Market liquidity depends on trading activity, market depth, and costs. High liquidity means large volumes, narrow bid-ask spreads, and small price moves when orders are executed. Low liquidity leads to wider spreads and greater price impact, making turning assets into cash more difficult.

Measurement and assessment vary by context. For assets, common indicators include bid-ask spread, trading turnover, price impact, and market depth. For firms and banks, liquidity risk is evaluated with ratios and metrics such as current and quick ratios, cash flow forecasting, and regulatory measures like the liquidity coverage ratio.

Common examples illustrate the concept. Cash and government securities on major exchanges are typically highly liquid, as are large, actively traded stocks. Illiquid assets include real estate, private equity, or thinly traded securities, which may require time to sell or incur larger discounts.

Liquidity matters because it affects pricing, risk, and the ability to meet short-term obligations. Liquidity risk can amplify financial stress during market disruptions.