What is Liquidity?
Written by True Tamplin, BSc, CEPF®
Updated on March 30, 2021
Liquidity is an estimation of how readily an asset or security can be converted into cash at a price that reflects its intrinsic value.
Ready cash is considered to be the most liquid possible asset, since it requires no conversion and is spendable as is.
Tangible assets, such as real estate, collectibles, fine art, and so on, are considered relatively illiquid since they can take a while to find a buyer at the appropriate price and process/finalize the transaction.
Securities like stocks or other publicly traded financial assets fall somewhere along the middle of the liquidity spectrum.
Market liquidity refers to liquidity within an entire market, such as the stock market or real estate market.
If a market has high market liquidity, then commodities in that market can be bought and sold at relatively stable, transparent prices.
The stock market, for instance, is characterized by high liquidity, at least when trade volume is high and not dominated by selling.
Accounting liquidity refers to the ability of a company or individual to meet their short term debt obligations with the assets they have at hand.
Individuals and companies with plenty of free cash or easily sellable assets like stocks have high accounting liquidity.
On the other hand, an individual or business that has their cash tied up in tangible assets may be relatively illiquid.