Liquidity Definition
When we talk about liquidity, we’re referring to the ability of an asset to be bought or sold quickly and without affecting its market price. Liquidity is important because it allows us to convert our assets into cash quickly and without incurring any losses.
There are two types of liquidity: primary and secondary. Primary liquidity refers to assets that can be converted into cash easily and without affecting the market price, such as cash itself or government bonds. Secondary liquidity refers to assets that can be sold quickly, but may incur a loss in value, such as stocks or real estate.
The most important thing to remember about liquidity is that it’s not a static concept – it can change over time depending on market conditions. For example, during a recession, there is typically less primary liquidity as businesses hoarded cash and investors became more risk-averse. However, during periods of economic growth, there is typically more primary liquidity as businesses invest their cash and investors are willing to take on more risk.
