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liquidity

li-KWID-i-tee /lɪˈkwɪdɪti/

nounC1GREGMATTOEFLIELTSUPSC

formalbusiness

The availability of liquid assets to a market or company; the ease with which an asset can be converted into cash without affecting its market price.

Cash is the most liquid asset. Real estate, while valuable, is generally illiquid because it takes time and effort to sell without a significant price reduction.

The story behind the word. The word 'liquidity' comes from the Latin 'liquidus,' meaning 'fluid' or 'flowing.' It originally referred to the physical state of a substance. Its financial meaning, referring to the ease with which assets can 'flow' or be converted into cash, emerged in the late 19th and early 20th centuries, drawing a parallel between fluid movement and financial flexibility.

Word relationships

cash flow: Refers to the actual movement of money in and out; 'liquidity' is the ability to generate cash.
solvency: The ability to pay all debts; 'liquidity' is the ability to pay short-term debts with readily available cash.

illiquidity: The state of an asset not being easily convertible into cash without a significant loss in value.

Commonly confused with

solvency: 'Liquidity' is about having enough cash to meet short-term obligations; 'solvency' is about having enough assets to cover all debts, long-term and short-term.

Word family

liquid (adjective): Readily convertible into cash.
liquidate (verb): To convert assets into cash.

Collocations

market liquidity
cash liquidity
liquidity crisis
liquidity risk
enhance liquidity
maintain liquidity

Example sentences

"During the financial crisis, many banks faced a severe liquidity crunch, struggling to access cash." Maintaining sufficient liquidity is crucial for businesses to meet short-term obligations.
"She prioritized investments with high liquidity so she could access her funds quickly if an emergency arose." Highly liquid assets include cash and easily tradable stocks.

Memory hook

Think of 'LIQUIDITY' as how quickly your assets can 'LIQUID'ate into cash. LIQUIDITY: assets flow like liquid.

When not to use

Do not use 'liquidity' to refer to the physical state of being a liquid (e.g., water).

Fun facts

The concept of 'liquidity preference' was introduced by John Maynard Keynes, referring to the demand for money as a store of value.
A 'liquid market' is one with many buyers and sellers, making it easy to trade assets quickly at fair prices.