Financial liquidity refers to how easily assets can be converted into cash. Cash, public stock, inventory, and some receivables are considered more liquid as a company or individual can expect to convert these to cash in the short-term. Long-term fixed assets or private securities are harder to sell, making them illiquid.
What is liquidity & how does it affect a market?
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently.
Why is liquidity important?
Liquidity is important as it indicates whether there will be the short-term inability to satisfy debts or make agreements whole. Assets like stocks and bonds are very liquid since they can be converted to cash within days. However, large assets such as property, plant, and equipment are not as easily converted to cash.
