Liquidity
Would you like to invest your money? Get in touch with an expert:
What is Liquidity?
In finance, liquidity means how quickly an asset can be bought, or sold, at its true price. It is necessary to have a market in order to sell and buy. In other words, it requires supply and demand. In general, the more popular a product is, the faster it can be sold. If you wish to sell a very valuable heirloom, for example, you will need a purchaser. It is possible to sell an heirloom at the true value very quickly, if many individuals are interested. An extremely rare stamp collection, for example, would be easier to sell than a less rare collection. The illiquid nature of the heirloom may require you to sell it at a lower price to find a buyer who will pay a reasonable amount.
In terms of liquidity, cash itself is the most liquid asset, while tangible assets, such as real estate are relatively illiquid. Liquidity can be classified into two main types: market liquidity and accounting liquidity.
Market liquidity is the extent to which a market allows to sell or buy assets at transparent prices. The stock market, for example, is considered relatively liquid. Exchange-traded shares are one of the most liquid investments, but there are differences here as well. Liquidity varies among stocks. There is a larger market for some stocks, so they are also traded more actively on the exchanges. This indicates that there is a higher demand for these shares. A large daily trading volume is usually indicative of a liquid stock. A buyer's willingness to pay (bid price) is generally close to a seller's asking price. As a result, there is an equilibrium in the market and the transaction is eventually completed. Due to the lack of liquidity in markets, sellers may be forced to sell their assets at a discount to close the deal more quickly, since the search for an appropriate buyer with a matching willingness to pay can be time consuming.
On the other hand, accounting liquidity refers to a company's ability to repay short-term debt with its current assets. Accounting liquidity is therefore one of many indicators that provide information about the financial health of a company. Please refer to the detailed article on liquidity ratios.
Would you like to invest your money?
Speak to an expert.
Your first appointment is free of charge.
