DEFINITION of 'Liquidity'
1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
2. The ability to convert an asset to cash quickly. Also known as "marketability."
There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.
It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.
Examples of assets that are easily converted into cash include blue chip and money market securities.
1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
2. The ability to convert an asset to cash quickly. Also known as "marketability."
There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.
It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.
Examples of assets that are easily converted into cash include blue chip and money market securities.
DEFINITION of 'Liquidity Risk'
The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk is typically reflected in unusually wide bid-ask spreads or large price movements (especially to the downside). The rule of thumb is that the smaller the size of the security or its issuer, the larger the liquidity risk.
The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk is typically reflected in unusually wide bid-ask spreads or large price movements (especially to the downside). The rule of thumb is that the smaller the size of the security or its issuer, the larger the liquidity risk.
