What is liquidity and why is it important?

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Liquidity is the ability you have to convert any asset into cash quickly. Everyone likes money because everyone knows how much it’s worth. And money is easily transferable; hence it’s why liquidity is important. 

Because money is among the most liquid of assets, since you can use it to buy just about anything. Many stocks traded on the major exchanges are considered fairly liquid, since you can convert them into cash quickly and easily because there’s almost always another investor willing to buy your shares. 

And liquidity it’s also an ability to buy or sell a security without affecting the asset’s price. When you’re talking about investments, your liquidity is basically how easy it is to buy and sell shares. Among other things when an asset is liquid, it has cash value, or can be easily converted to money. 

Therefore liquidity can be important in cases of emergency of whether you’re able to pay your bills with the money in your pocket. Or sell assets quickly to raise the money. It’s vital that you’ve some of your wealth in assets that you can sell quickly if needed. 

Some of these assets can include government bonds, stocks, and money market instruments, money deposited into a savings or checking account, tax refunds, mortgages, court settlements, certificates of deposits, and trust fund monies. 

While items like real estate, jewelry, stamp and card collections, or cars don’t count as liquid assets for these items take time in being sold out. Liquid assets are readily available to be converted into cash and sold on short notice. These items will, however, not lose value on being sold at a short notice. On the contrary, if a card collection is sold online, it might lose value due to the speediness of the transaction.

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