Definition
Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price. Cash is the most liquid asset, while real estate and collectibles are illiquid. For individuals, liquidity means having enough cash or easily accessible assets to cover emergencies and short-term obligations. For businesses, liquidity ratios measure the ability to pay short-term debts.
Formula
A common liquidity ratio measuring a company\'s ability to pay short-term obligations. A ratio above 1 indicates good liquidity.
Example
Asset Liquidity Example
If you need $10,000 immediately, you could withdraw it from a savings account instantly (highly liquid). Selling $10,000 worth of publicly traded stocks might take 1-2 business days (moderately liquid). Selling a car worth $10,000 might take weeks or months (illiquid). This is why financial experts recommend keeping 3-6 months of expenses in liquid savings for emergencies.