How is liquidity defined in investments?

Liquidity in investments refers to the ease with which an asset can be converted into cash without significantly affecting its price. This concept is crucial for investors because it assesses how readily they can access their funds in the event of an emergency or when an investment opportunity arises.

For example, cash is the most liquid asset, as it can be used immediately for transactions. Conversely, assets like real estate or collectibles are less liquid since selling them may take time and could involve transaction costs, thereby potentially impacting their market value.

Understanding liquidity helps investors make informed choices about the types of assets they hold, balancing their portfolio according to their needs for quick access to cash versus potential long-term gains from less liquid investments.