Liquidity
li-KWID-ih-tee
/lɪˈkwɪdɪti/
The ease with which an asset can be converted into cash without affecting its market price.
High liquidity is desirable for assets that may need to be sold quickly, while illiquid assets can be difficult to sell without a significant discount.
The story behind the word. The word 'liquidity' comes from the Latin 'liquidus', meaning 'fluid, flowing, clear'. This root is also the source of 'liquid' (a substance that flows). In finance, the idea of an asset being 'liquid' means it can 'flow' easily and quickly into cash, much like a liquid substance flows. The term gained its financial meaning in the late 19th and early 20th centuries.
Word relationships
- Cash flow: Refers to the movement of money in and out of a business; 'liquidity' is about the ease of converting assets to cash.
- Marketability: The ease with which something can be sold; 'liquidity' is specifically about conversion to cash without price impact.
- Illiquidity: The state of an asset being difficult to convert into cash quickly without a significant loss in value.
Word family
- Liquid (adjective): Easily converted into cash.
- Liquidate (verb): To convert assets into cash.
Collocations
- market liquidity
- cash liquidity
- high liquidity
- low liquidity
- liquidity crisis
Example sentences
- "Cash is the most liquid asset, followed by publicly traded stocks and highly rated bonds." Investment characteristics
- "During a financial crisis, market liquidity often dries up, making it hard to sell assets." Market conditions
- "It's important to maintain sufficient liquidity in your emergency fund to cover unexpected expenses." Personal finance
Memory hook
Think of 'liquidity' as how 'liquid' an asset is – how easily it 'flows' into cash. Flows to cash
When not to use
Do not confuse 'liquidity' with 'profitability' or 'solvency' (ability to pay debts).
Fun facts
- Gold has historically been considered a highly liquid asset, often used as a store of value and easily traded globally.
Explore more words
Convertibility, volatile, net worth, mobility, solvency, flexibility
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