What does 'liquidity' in finance refer to?

Liquidity in finance refers to the ease with which an asset can be converted into cash without significantly impacting its market price. This concept is crucial for businesses and investors because it determines how quickly they can access cash to meet obligations or take advantage of opportunities. High liquidity means assets can be sold quickly and without a loss in value, such as cash itself or stocks of large companies.

Understanding liquidity helps in assessing financial health and risk management. An asset that is not liquid can take longer to sell, may require selling at a discount, or could take time to find a buyer, which can hinder a company’s ability to respond swiftly in financial situations. Thus, the concept directly impacts how businesses manage cash flows and make investment decisions.