Updated Jun 26, 2020Definition
The degree to which an asset can be converted into the common medium of exchange of an economy without affecting its valuation.
Example
An example of a highly liquid asset could be publicly traded shares of a company. Those can be bought or sold at a moment’s notice. A house on the other hand is not very liquid, as it will usually take some time to find a buyer who is willing to pay the right price. If you need to sell the house quickly, you will have to do so at a much lower price (i.e. a lower valuation).
Relevance
Liquidity is a crucial aspect for both firms and individuals in an economy. If the majority of their assets is rather illiquid, the risk of insolvency increases. Therefore it is essential to take liquidity into account at all times, and especially before taking investment decisions.
