Liquidity refers to the ease with which an asset, or an investment, can be converted into cash without significantly affecting its market price. Highly liquid assets can be bought or sold rapidly in the market, often with little impact on their prices. On the contrary, assets that are difficult to sell quickly without a substantial price reduction are considered illiquid.
Liquidity is a critical aspect for investors because it affects the speed and ease with which they can enter or exit positions. Stocks listed on major exchanges, for instance, are typically considered liquid because they can be readily sold on the open market. In contrast, assets like real estate or shares in a privately-held company are generally less liquid due to the longer timeframe required to find a buyer and complete the sale.
In the context of a financial market, liquidity refers to the ability of the market to facilitate the buying or selling of assets without causing significant price changes. A market is considered "liquid" if there are enough participants and volume for large transactions to occur without significant price fluctuations.
