What does the term "liquidity" refer to?

The term "liquidity" specifically refers to the ability to quickly convert assets into cash without significant loss in value. This concept is crucial in finance and investing because it impacts how easily assets can be used to meet immediate financial needs or obligations. Liquid assets, such as cash or stocks, can be quickly sold or leveraged to access funds, making them valuable for both individuals and businesses.

Assets with high liquidity are those that can be converted into cash with minimal price fluctuations and transaction costs. In contrast, illiquid assets, such as real estate or collectibles, may require more time and effort to sell and could incur substantial loss of value if sold quickly. Hence, the ability to maintain liquidity is vital for effective cash management, allowing for flexibility in financial planning and decision-making.