What does liquidity refer to in financial terms?

Liquidity in financial terms refers to the ability to quickly convert an asset into cash. This concept is critical for businesses and individuals because having liquid assets allows them to meet short-term obligations and take advantage of immediate investment opportunities without significant loss of value.

Cash itself is the most liquid asset, and assets like stocks and bonds are also considered liquid, as they can typically be sold quickly in financial markets. On the other hand, real estate, collectibles, or long-term investments may take longer to sell and thus represent lower liquidity. Understanding liquidity helps assess the financial health of an entity, showing how well it can meet its short-term liabilities or respond to emergencies with cash flow.