What is the definition of liquidity in financial terms?

Liquidity in financial terms refers to the ease with which an investment can be converted into cash without significantly affecting its market price. This concept is crucial in finance because it reflects how quickly an asset can be sold and converted into cash, which is vital for meeting short-term obligations or taking advantage of new investment opportunities.

For example, cash itself is considered the most liquid asset, as it can be readily accessed and used for transactions. In contrast, real estate or collectibles may take longer to sell and could potentially require price reductions to attract buyers, making them less liquid. This understanding of liquidity is essential for investors, as it influences their decisions based on how readily they could access funds should the need arise.