What is Liquidity?

Simply, liquidity is the concept of how easily an asset or security can be converted into cash without losing its value. As you might expect, cash is the most liquid asset. On the other end of the spectrum, real estate can be the most illiquid asset given the amount of time involved in selling and the lack of clarity on the asset’s true value.

However, liquidity can have different meanings depending on the security or account.

In the stock or bond markets, liquidity refers to how quickly a purchase or sale can occur at a price consistent with the asset’s current value. For example, Apple’s stock is highly liquid due to its high trading volume and therefore, can be instantly bought or sold at its current price. On the other hand, a small company with little trading activity may take more time to find a buyer or seller at a price that is aligned with its value, making it more illiquid. A transaction in a thinly traded stock or bond also may cause a large move in its price.

Jemma Everyday Wisdom: Most investors will utilize a combination of investments that have varying degrees of liquidity to meet their long and short-term needs. For example, it is wise to have at least six months of living expenses in liquid assets—ideally cash—held in a savings account in case of any unexpected emergencies in the short-term.