In investment terms, what does "liquidity" refer to?

Liquidity refers to the ability to quickly convert an asset into cash without significantly affecting its price. This concept is crucial in the investment world because investors often seek to ensure that they can access cash when needed, especially during times of market volatility or financial emergencies.

For instance, cash itself is considered the most liquid asset, while real estate or collectibles might take longer to sell and could require significant price reductions to sell quickly, reflecting lower liquidity. In essence, high liquidity means that an asset can be sold almost instantly with minimal price impact, allowing investors to manage their portfolios and respond to market conditions efficiently.

Understanding liquidity helps investors assess the risks and benefits of different asset types, enabling informed decision-making regarding their investment strategies.