Liquidity refers to how easily an asset can be bought or sold.
At the individual investor level: Investors should be focused on profiting over the long term. However, your assets should have varying degrees of liquidity so that you can access some of your money quickly in order to take advantage of opportunities, deal with emergencies, or buy a boat. Those would be your liquid assets.
Cash is the ultimate liquid asset. A savings account is very liquid because it can be withdrawn quickly and easily. Shares in a popular stock that trades frequently could be considered a liquid investment. If you own shares of Coca-Cola, for instance, it would be relatively easy to sell them in the market on any given day. You might not make a profit, but you'd have cash.
An illiquid asset would be something like your house. Or a trust fund you're not allowed to access until you turn 50 (if you're 39).
At the stock level: Liquidity refers to how easy it is to buy or sell a large number of shares without having a big effect on share price. Liquid stocks can absorb the high volume more easily than nonliquid stocks.
At the company level: Check the liquidity of your companies to see if they would be able to access cash quickly if necessary, for instance, to make a debt payment. Are there enough cash and "cash equivalents" on hand to cover the payment?
At the market level: Markets and economies in general need to have liquidity, in terms of a flow of money and credit, otherwise operations are hindered, as there's no fuel, no grease.
Related Fool Articles
Recent Mentions on Fool.com
- Here's What Is Fueling Halcon Resources Corp's Surge Today
- What Stock Market Crash? These Stocks Have All Moved Higher
- Believe It or Not, This Coal Company Just Raised Its Dividend
- 3 Dividend Stocks Retirees Should Avoid
- 3D Printing Stocks News: Google Leads a $100 Million Investment in Carbon3D
- Lumber Liquidators Stock Plummets on Surprise Loss, Potential Regulatory Action