(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)
Liquidity is how quickly an asset can be converted into cash without significantly affecting its price, or how easily an organisation can access money when it needs to. It matters in large financial systems, but it’s just as relevant in everyday life.
Market liquidity refers to how easily assets can be bought and sold without moving the price too much. Shares in large, well-known companies tend to be more liquid than those in smaller firms because they’re traded more frequently.
Accounting liquidity looks at whether a company can meet its short-term obligations. A business might appear successful, but if its money is tied up in stock or assets and it can’t pay its bills, it has poor liquidity. This is often described as liquidity risk.
For individuals, liquidity is about having enough accessible cash to cover bills and unexpected costs, rather than having everything tied up in long-term investments like pensions. It’s about balance.
Liquidity is often measured using ratios such as the current ratio (current assets divided by current liabilities) and the quick ratio (current assets minus inventory, divided by current liabilities).
Love Eleanor. xxx
