Easy convertibility into cash. A liquid asset or security can be easily bought or sold with little or no impact on price. Most methods of counting money supply include some highly liquid investments such as certificates of deposit. Liquid assets and investments are highly desirable as they may be sold to allow an investor to enter other investments as they arise. On exchanges. liquid investments usually have low bid-ask spreads. See also: Illiquid. Liquidity preference hypothesis .
A large position in cash or in assets that are easily convertible to cash. High liquidity produces flexibility for a firm or an investor in a low-risk position, but it also tends to decrease profitability.
If you can convert an asset to cash easily and quickly, with little or no loss of value, the asset has liquidity. For example, you can typically redeem shares in a money market mutual fund at $1 a share.
Similarly, you can cash in a certificate of deposit (CD) for at least the amount you put into it, although you may forfeit some or all of the interest you had expected to earn if you liquidate before the end of the CD's term.
The term liquidity is sometimes used to describe investments you can buy or sell easily.
For example, you could sell several hundred shares of a blue chip stock by simply calling your broker, something that might not be possible if you wanted to sell real estate or collectibles.
The difference between liquidating cash-equivalent investments and securities like stock and bonds, however, is that securities constantly fluctuate in value. So while you may be able to sell them readily, you might sell for less than you paid to buy them if you sold when the price was down.
The ability of a person or company to readily and easily obtain cash from its assets in order to meet obligations or make purchases.
What Does Liquidity Mean?
(1) The degree to which an asset or security can be bought or sold in the market without affecting its price. Liquidity is characterized by a high level of trading activity. (2) The ability to convert an asset into cash quickly. Also known as marketability.
Investopedia explains Liquidity
(1) Sometimes it is safer to invest in liquid assets than in illiquid ones because liquid assets make it easier for an investor to get his or her money out of the investment more quickly. (2) Examples of assets that are easily converted into cash include blue-chip stocks and money market securities.