What is Liquidity?
The ease with which an asset can be quickly bought or sold in the market without affecting its price.
Liquidity describes how easily and rapidly an asset can be converted into cash at its current market price. High liquidity means an asset can be sold quickly with minimal price impact, while low liquidity means selling may take time or require a price discount. Cash is the most liquid asset.
In financial markets, liquidity is crucial because it affects transaction costs and price stability. Highly traded assets, like shares of major S&P 500 companies or US Treasury bonds, are very liquid. In contrast, assets like real estate or thinly traded penny stocks are considered illiquid, as selling them can be a slow process that may significantly move the market price.