Liquidity
What is liquidity?
Liquidity (lat. liquidus - liquid, flowing) - an economic term that refers to the property of assets to quickly turn into a monetary equivalent, that is, to be sold at a price equal to the current market price. In other words, liquidity is the ability of an asset to be sold quickly with minimal cash losses associated with the speed of sale.
What is the essence of liquidity?
Liquid businesses can be, securities, real estate, jewelry, etc. If they say "liquid asset" about something, it means that it can be quickly converted into money, i.e. there is a high demand for it.
The broad application of the term "liquidity" provides an opportunity to better understand the processes of purchase and sale of various goods and assess their characteristics. Liquidity is a qualitative characteristic; in this connection, liquidity ratios provide a qualitative comparison of similar categories of goods, etc.
What types of liquidity are there?
The following types of liquidity exist in the financial sphere:
- liquidity of banks (firms);
- liquid assets;
- liquid funds.
There is also a distinction between highly liquid, low-liquid and illiquid assets. The faster an asset can be sold for its full value, thereby converting it into money, the higher its liquidity. That is, in fact, the concept of "liquidity" is directly proportional to the speed of its sale.
What are the most liquid assets on the market?
Currencies are considered the most liquid assets.
The second most liquid securities are first-class securities.
In the securities market, liquidity is directly related to the number of trades made in a given asset, the number of current offers to buy and sell. As a rule, assets traded on exchanges are more liquid than what is traded on unorganized markets. Moreover, in professional language the most liquid shares on the stock exchange are usually called first-tier securities or blue chips, while the rest are second-tier securities.
It would be fair to put precious metals in third place in the liquidity ranking. They would have taken a well-deserved second place if not for the legislative restrictions on their circulation. Nevertheless, such metals as gold, silver, platinum and palladium are exchange-traded commodities. Their price is determined in the centers of world trade, in New York and London. Bullions of these metals can potentially be sold at any minute and with minimal losses.
The more liquid an asset is, the less risky it becomes for the investor. Based on this logic, the purchase of real estate, for example, should be recognized as a sufficiently risky venture.