What does liquidity in financial terms refer to?

Liquidity in financial terms refers to the ease with which assets can be converted into cash without significantly affecting their value. This concept is fundamental in personal finance because individuals and businesses often need access to cash for various purposes, such as emergencies, investments, or purchases.

When assets are highly liquid, such as cash or stocks, it means they can be sold quickly and with little loss in value. In contrast, assets that are illiquid, like real estate or certain collectibles, may take longer to sell and could require a price reduction to complete a sale, making it more difficult to access cash when necessary. Understanding liquidity helps individuals make informed decisions about their investments and manage their finances effectively.