- ability of current assets to meet current liabilities when due. The degree of liquidity of an asset is the period of time anticipated to elapse until the asset is realized or is otherwise converted into cash. A liquid company has less risk of being unable to meet debt than an illiquid one. Also, a liquid business generally has more financial flexibility to take on new investment opportunities.
- immediate convertibility into cash without significant loss of value. For example, marketable securities are more liquid than fixed assets, because securities are actively traded in an organized market.
- ability of an organization to meet its current financial obligations. In banking, adequate liquidity means being able to meet the needs of depositors wanting to withdraw funds and borrowers wanting to be assured that their credit or cash needs will be met. Liquidity is also measured in terms of debt capacity or borrowing capacity to meet short-term demands for funds. See also liquidity ratios.
- quality of an asset that is readily convertible into cash, with minimal loss in value. Short-term securities, such as Treasury bills that are easily sold to other investors at relatively narrow spreads between bid and asked quotes, and in reasonably large trading volumes, are said to be highly liquid.
- characteristic of a market where a large amount of securities, futures contracts, and so on, can easily be traded with minimal price distortions occurring. Strong markets are characterized by stable prices and relatively narrow bid-asked spreads. Thin markets have wide spreads and extreme trading volatility. See also depth of the market.
- ability of an individual or company to convert assets into cash or cash equivalents without significant loss. Investments in money market funds and listed stocks are much more liquid than investments in real estate, for instance.
- characteristic of a security or commodity with enough units outstanding to allow large transactions without a substantial drop in price. A stock, bond, or commodity that has a great many shares outstanding therefore has liquidity.
ability to buy or sell an asset quickly and in large volume without substantially affecting the asset's price. Shares in large blue-chip stocks like General Motors or General Electric are liquid, because they are actively traded and therefore the stock price will not be dramatically moved by a few buy or sell orders. However, shares in small companies with few shares outstanding, or commodity markets with limited activity, generally are not considered liquid, because one or two big orders can move the price up or down sharply. A high level of liquidity is a key characteristic of a good market for a security or a commodity.
Liquidity also refers to the ability to convert to cash quickly. For example, a money market mutual fund provides instant liquidity since shareholders can write checks on the fund. Other examples of liquid accounts include checking accounts, bank money market deposit accounts, passbook accounts, and Treasury bills.
ease of converting assets to cash. Contrast with illiquidity.
Examples: Common stocks and U.S. savings bonds have good liquidity. real estate and many types of collectibles generally have poor liquidity.
