What does liquidity refer to in financial terms?

Liquidity in financial terms refers to the ability to convert an asset into cash quickly without losing value. This concept is crucial for both individual investors and businesses, as it indicates how readily available funds are for meeting obligations or making investments. For instance, cash is considered the most liquid asset because it can be used immediately for transactions.

Other assets, such as stocks, real estate, or collectibles, may take longer to sell and might not retain their full value when sold quickly, particularly in a distressed market. Therefore, a highly liquid asset can be sold with minimal price discounting, preserving the owner's value in the process.

Understanding liquidity helps individuals and companies manage their finances effectively, ensuring they can access cash as needed while balancing investment in less liquid assets that may offer higher returns over time.