What Is Liquidity?
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Liquidity simply means the efficiency of which an asset, security or commodity can be converted into physical money or cash without it affecting the price in the market. Cash is the most liquid asset in the world while tangible items are less liquid. Cash ratios, Quick, and current are considered useful in measuring liquidity. There are two types of liquidity namely, Accounting liquidity and Market liquidity.
Another simple definition of liquidity is the degree in which an asset or commodity can be purchased or sold in the market at a price representing it's initial value. As you all know, Cash is globally considered to be the most liquid asset due to its unique nature of fast and easy conversion rate to other assets. Examples of tangible assets includes Fine art, Collectibles and Real Estate are all considered relatively illiquid.
For example, if a person wants a $500 air conditioner, cash is the common asset that's used to purchase it. But maybe that person doesn't have cash but a rare art collection that has been appraised at $500, it's quite unlikely to find a person willing to trade the air conditioner for the art collection. Most likely, he will have to sell his collection and use the cash to purchase the air conditioner. It's not a problem if the merchant can wait for weeks or months to make the purchase, but it'll become a Problem if the person had just a few days. Thus, the impatient will likely make the man sell at a discount price instead of waiting for a buyer that'll pay for the full value. Art collections are example of illiquid asset.
There are two types of liquidity namely, Accounting liquidity and Market liquidity which I'll explain below:
- Market Liquidity
Market liquidity is a type of liquidity that allows assets like City's real estate market or country's stock market to be sold and bought at a transparent and stable price. In the example above, the market for air conditioners in exchange for the art collection is so illiquid that the purpose and intents makes it looks like it doesn't exist.
- Accounting Liquidity
This type of liquidity calculates the level at which a company or individual can reach their financial obligations with the said liquid assets obtained by them. In the example stated above, the art collection asset are relatively illiquid and might not worth their maximum value at $500 in hint. Using investment terms, accounting liquidity means the ability to compare liquid assets to current liabilities.
That concludes everything about liquidity, I hope you enjoyed my article. Thanks for reading ⭐
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You've published a great content explaining liquidity and the types
Thanks for reading ⭐
Now I understand the difference between quality and quantity.
Although short, your post is full of quality, little wonder you received booming support on the day this post was made.
You have done excellently well in explaining liquidity in simple terms, you have also explained the types of liquidity.
Prior to now, I didn't know that we had other forms of liquidity asides from the cryptomarket liquidity, but with this interesting post of yours, I have learnt the other types of liquidity we have.
Thank you @ronindboss for this educative content.