Liquidity

Key Highlights

• Liquidity is how easily and quickly you can turn something you own, like a stock or a house, into cash without losing much of its value.

• Types of liquidity include market liquidity and accounting liquidity.

What is Liquidity?

Liquidity is how easily and quickly you can turn something you own, like a stock or a house, into cash without losing much of its value.

Types of Liquidity

• Market Liquidity: How fast you can buy or sell something (like stocks) without messing up its price.

• Accounting Liquidity: How well a company can use its ready cash or quick-to-sell assets to cover short-term debts. Think of it as a company’s ability to handle its immediate bills.

Examples

• Super Liquid: Cash, savings, or popular stocks—easy to turn into money fast with little hassle.

• Less Liquid: Things like houses, rare coins, or a private business—they take time to sell and might need a price cut to move quickly.

Why It Matters?

Liquidity keeps things running smoothly. For you, it means having cash when you need it. For businesses, it’s about paying bills without stress. To check liquidity, people use:

• Current Ratio: All short-term assets divided by short-term debts.

• Quick Ratio: Same as above, but skip inventory (it’s harder to sell fast).

• Cash Ratio: Just cash and similar stuff divided by debts.