Liquidity

In finance, the term liquidity denotes the ease and speed with which assets can be exchanged for other assets or for goods and services.

If there is a strong demand for a piece of real estate, commodity, currency or security, that asset is said to be liquid, meaning it can quickly and easily be exchanged for other assets.

If the demand for an asset is relatively low, it is said to be illiquid because it cannot easily be traded for cash or for other assets. Examples of illiquid assets include real estate, commodities, currencies and securities for which there is not a strong demand. Assets on which legal restrictions are placed which obstruct the transfer of ownership may also be considered illiquid even if demand for them is high, due to the legal difficulties associated with trading in those assets.

When used in relation to companies, the term liquidity describes the portion of a company’s assets which can easily be converted into cash. If too large a portion of a company’s assets are illiquid (such as specialized machinery and buildings, unsold stock or research and development investments) the company may experience liquidity problems. This means that it does not have enough liquid assets on hand to cover its financial outflows. A company may make use of business loans or factoring to obtain liquid asset in order to balance its illiquid assets and maintain liquidity.

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