What Is Liquidity?
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.
Assessments from the Experts
Looking at industry practices can be a help in assessing your business’ liquidity. But taking the expertise of a financial advisor is more effective in your need for guidance and analysis. Consult with a financial advisor in Chesterfield County, VA or visit our financial advisor page to connect with one closest to your area.
What Is Liquidity FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.