Liquidity
The ease with which an asset can be converted to cash without significantly affecting its price.
Definition
Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its market price. Cash is the most liquid asset, while real estate and collectibles are among the least liquid. In financial markets, liquidity is measured by trading volume and bid-ask spreads — highly liquid markets (like major stock exchanges) have high volume and tight spreads, allowing large trades with minimal price impact. Liquidity is important for investors because illiquid investments may be difficult to sell quickly or may require accepting a significant discount. Market liquidity can dry up during financial crises, causing prices to gap and spreads to widen dramatically.