In investment terminology, what does the term 'liquidity' refer to?

Liquidity refers to the ability to convert an asset into cash quickly and with little impact on its market price. This is a crucial concept in investment, as it indicates how easily an investor can sell an asset in the market. An asset that is highly liquid, such as stocks traded on major exchanges or cash itself, can be quickly bought or sold without significantly affecting its price.

In contrast, assets with lower liquidity, such as real estate or collectibles, may take longer to sell and could require greater price reductions to attract buyers. Understanding liquidity is vital for investors, as it impacts their ability to respond to market changes, make timely decisions, and manage their portfolios effectively. This knowledge helps in assessing investment risks and formulating strategies aligned with individual financial needs and goals.