Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.



Types of Liquidity:

1. Market Liquidity: How easily assets like stocks, bonds, or real estate can be bought or sold in a market.

Example: A stock traded frequently on a major exchange like the NYSE is very liquid.

2. Accounting Liquidity: A company's ability to meet its short-term financial obligations using its current assets.

Example: Cash and accounts receivable are highly liquid; machinery and buildings are less so.

High Liquidity = Easy to sell quickly at fair value

Low Liquidity = Hard to sell quickly without a price drop
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