In financial terms, what does "liquidity" refer to?

Liquidity refers to the ability to convert an asset into cash quickly and without a significant loss in value. Cash is considered the most liquid asset, while real estate, collectibles, and other investments may take longer to sell and might not sell for their full value. Therefore, when assessing the liquidity of an asset, one examines how easily it can be accessed as cash, which is crucial in financial planning and management.

Understanding liquidity is essential for individuals and businesses alike. For example, having a high level of liquidity allows individuals to respond quickly to unexpected expenses or investment opportunities without needing to sell other assets at inopportune times. Thus, the concept of liquidity is foundational in personal finance and investing, making the ability to quickly convert an asset to cash a vital measure of financial flexibility.