What does liquidity refer to in finance?

Liquidity in finance refers to the ability to quickly convert assets into cash without significantly affecting their market price. This concept is crucial because it determines how easily a business or individual can access cash when needed, especially in situations requiring immediate payment or investment opportunities.

When an asset is highly liquid, it means it can be sold or converted into cash relatively quickly, such as stocks listed on a major exchange or cash itself. Conversely, illiquid assets, like real estate or collectibles, may take longer to sell and could require accepting a lower price to secure a quick sale.

This focus on the speed and ease of conversion to cash distinguishes liquidity from other financial metrics that deal with profitability, debt levels, or growth potential, as these concepts relate to different aspects of financial analysis and decision-making.