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What is the definition of liquidity?


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February 01, 2011 9:11AM


Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid.

A high level of trading activity, allowing buying and selling with minimum price disturbance. Also, a market characterized by the ability to buy and sell with relative ease. Antithesis of illiquidity.

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.