What is liquidity?
Liquidity is the ease and speed with which an asset or security can be bought or sold.
What is meant by liquidity in finance?
Financial liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market value. Assets like stocks and bonds are very liquid and can be converted into cash in a matter of days. Large assets and tangible items such as property and equipment are often not liquid because they need to be sold before you can use up and spend the cash, which can take weeks or months. Cash (including checking accounts) is considered the most liquid asset. Investments such as stocks and bonds are liquid assets that are easily converted into cash. Assets that take longer to convert to cash include preferred or restricted stocks because they have contracts that dictate how and when they can be sold.
Market liquidity refers to the ability of the market to buy and sell assets easily and quickly. For example the stock market is a highly liquid market.
The liquidity of a stock can be determined by the difference between its ask and bid prices. The larger the difference between the ask and bid prices of a stock, the less liquid the stock becomes.
Why is liquidity important?
It is important for companies and individuals to know the liquidity of their assets as to how easily short-term liabilities can be paid.
Liquid assets give you more flexibility. Quick access to cash gives you the ability to pay bills and loans if your cash or income flow is disrupted. It is important to have liquid assets in an emergency fund so that the money can be used when needed.
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