Liquidity Definition

What is Liquidity?

The financial term liquidity refers to the way an asset, security or bond can be converted into available capital without impacting its market price.

Understanding the term Liquidity

Simply put, liquidity refers to the extent with which an asset can be swiftly purchased or sold in the financial markets at a price mirroring its market value. Money is generally referred to as the most liquid asset due to the fact that it can be easily and swiftly transformed into alternative assets. Tangible assets including real estate, collectibles, fine art, are not as liquid as cash. Alternative financial assets, including equities and partnership units, stand at different sectors of the liquidity spectrum.

For instance, let’s say that a consumer wants to buy a oven worth one thousand five hundred dollars, money is the asset that can be most easily used to purchase it. If the consumer in question does not have the money but has a rare stamp collection worth one thousand five hundred dollars, the chances that the individual will find a seller willing and ready to trade the oven for the stamp collection are virtually non-existent. This may not be an issue if the consumer could wait an extended period of time to complete the purchase, however, it could raise an issue if the consumer needed to buy the product in a few days. Rather than selling the stamp collection at its full price the consumer could sell it at a discounted price to get the money faster. Rare stamp collections are an example of an illiquid asset.

Liquidity can be broken down into two key measures

Market Liquidity – describes the extent with which a market, such as a nation’s stock market or real estate market, enables assets to be purchased and sold at stable, clear prices. In the aforementioned example, the markets for ovens in exchange for rare stamp collections is so illiquid that for all intentions it does not exist. Alternatively, the stock market is renowned for high levels of market liquidity. In the event that an exchange has a high quantity of trade that is not controlled by selling, the price a purchaser offers per share (bidding price) and the price the seller is willing to settle for (the ask price) will be considerably close to one another. Investors and traders will not have to relinquish unrealized gains for an abrupt sale. When the spread amongst the ask and bid prices increases, the market becomes less liquid. Real estate markets are commonly more illiquid when compared to stock markets. Market liquidity for alternative assets, including contracts, derivatives, currencies, and commodities, usually depends on their size, and how many active exchanges exist for them to be traded.

Accounting liquidity calculates the ease with which an investor or business can meet their financial obligations with the liquid assets that they have access to. In the example we mentioned above the rare stamps collector’s assets are relatively illiquid and would likely not be worth their full value of one thousand five hundred in a pitch.

Summary of the most important points

The term liquidity refers to the ease with which a security or asset can be exchanged for cash without impacting its market price.

The most liquid asset is cash whereas tangible goods are illiquid and the two key types of liquidity cover market liquidity and accounting liquidity.

Current, fast, and cash ratios are typically used to calculate liquidity.

Trading CFDs on leverage involves significant risk of loss to your capital. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

Contact information

Phone number : ———
Customer Support Email:

Risk Warning:


Please note, that we are providing the users of the Website with education services only which consist of various trading ‘training’ courses, including, but not limited to tutorials, blogs, education packages, and several levels of market coaching, offered solely for educational and training purposes on our Website, which you may purchase from the Company through the Website. 

Trading in financial instruments involves high levels of risk. While we do not offer any trading services in relation with any financial instruments, it is important for us to highlight that you should not trade in any financial instruments, or deal with any financial services provider, unless you understand and can undertake all the risks involved. You are solely responsible to conduct your individual research before making any investment decision, and where appropriate obtain personal advice in this regard. We do not provide such advice, and you should consult independent advisors.

You must also note, that trading in financial instruments with any provider that you will chose involves a high level of risk. Trading in leveraged instruments (e.g. CFDs or forex contracts) involves an even higher risk of financial loss – leverage may work in your benefit, as well as against you. Trading in leveraged financial instruments may result in large financial loss (even of the entire amount of your investment). Before trading in any financial instruments, and even more so in leveraged financial instruments, you should make sure you fully understand, and can tolerate, the risks involved in trading. Trading in financial instruments is not suitable for all investors, and you are responsible to assess whether trading is suitable for you. We will not assess your personal situation (including financial situation) as we provide educational services only, and we cannot opine in the suitability of trading in general, or of trading in any particular financial instruments, might be suitable for you. We do not provide any trading, financial, tax or legal advice, and you should consult your own independent advisors before engaging in trading. Any information provided to you as part of our education services constitutes general information only, is not made personally for you, does not take into account your personal circumstances, and although it may contain certain predictions, does not include any guarantee that any such prediction should be correct or accurate. You are solely responsible to assess the quality of any information, as well as its appropriateness for your personal circumstances. We are not, and shall not be, responsible for any loss or damages you may suffer as a result of trading in financial instrument with any third party, or your reliance on any information, prediction, analysis or report provided to you. Do not trade with money which you cannot afford to lose. Or with borrowed money.