In financial terms, what does liquidity refer to?

Liquidity in financial terms primarily refers to the ease with which an asset can be converted into cash without significantly impacting its market price. This concept is crucial for investors and companies alike, as it determines how quickly they can access cash when needed. Highly liquid assets, such as cash or stocks of large, established companies, can be sold quickly and at stable prices, making them valuable for meeting short-term obligations.

In contrast, assets that are not easily convertible to cash, like real estate or collectibles, can take longer to sell and may require price concessions, illustrating lower liquidity. Understanding liquidity helps in assessing an entity's financial health and its ability to respond quickly to market changes or operational demands.