What Is Liquidity?
Liquidity is a term used to describe the ability of an asset or security to be converted into cash quickly and without any significant loss in value. It is important for investors, as it allows them to access their funds when needed. Liquid assets are those that can easily be sold on short notice with minimal impact on price. Examples include stocks, bonds, mutual funds, money market accounts and certificates of deposit (CDs).
The liquidity of an asset depends on its demand in the marketplace; if there are many buyers interested in purchasing it then it will have high liquidity. Conversely, if few people want to buy the asset then its liquidity will be low. The more liquid an asset is, the easier it is for investors to convert their holdings into cash when they need it most. This makes liquidity one of the key factors considered by investors when making investment decisions since having easy access to capital can help protect against losses during times of financial distress or uncertainty.