What Is Liquidity?

Liquidity refers to how quickly you can turn an asset into cash without affecting its value. Assets that sell rapidly for their full value are considered highly liquid. Assets that take longer to sell or only move quickly at a discount are less liquid (illiquid).

🤔 Understanding liquidity

Different asset types often have different levels of liquidity. For instance, cash is more liquid than securities like stocks, which are more liquid than tangible assets like real estate.

However, liquidity can also vary between assets of the same type. Consider the stock market, where large-cap stocks are generally highly liquid thanks to their:

  • High trading volumes
  • Tighter bid-ask spreads (the difference in asking and sales price)
  • Fast trade execution

By contrast, penny and OTC stocks are relatively illiquid, as they tend to trade less frequently and have wider bid-ask spreads.

Two types of liquidity

You can look at liquidity in two primary contexts: accounting and market liquidity.

Accounting liquidity measures a company’s ability to pay short-term debts with liquid assets. For example, a company that maintains ample cash or stock investments is more liquid than one that holds real estate.

By contrast, market liquidity measures how easily an asset trades in its public market at stable, transparent prices, such as the stock or real estate markets.

How to measure liquidity 

How you measure liquidity varies based on the assets you’re talking about.

For instance, you can measure accounting liquidity using mathematical ratios such as the:

  • Current ratio, which indicates a company’s ability to pay debts within a year
  • Quick ratio, which reveals a company’s ability to use cash, marketable securities, and accounts receivable to pay its debts
  • Cash ratio, which tells you how much cash (and equivalents) a company carries compared to its debts

But you can’t measure market liquidity with these same ratios. Instead, you have to consider metrics relevant to the asset in question.

For example, if you’re trading stocks and bonds, you can use bid-ask spreads and daily trading volumes to measure liquidity. And for real estate, you can look at how quickly properties sell in a specific location, as well as how sales prices generally compare to market value.

What this means for you

Generally, investors concern themselves more with market liquidity, as the ability to trade assets quickly can be crucial. Additionally, when you’re saving up for specific goals, it’s wise to know how quickly you can access the cash value of your savings without decreasing their value.

By contrast, accounting liquidity can give you a better sense of a company’s flexibility. As a rule, high liquidity tends to indicate a company on firm financial footing, while low liquidity may suggest that it will struggle during economic downturns. You can also use liquidity ratios to compare companies. (However, you should only compare companies in the same sector, as “normal” varies between industries.)

Understanding the liquidity of your assets is an essential component of risk management. If you can easily convert your accounts into cash, then you’re better positioned to handle emergencies. But if you mainly hold illiquid assets, you may struggle to get the capital you need in a market downturn.

Additionally, you can look at liquidity as another way to diversify your portfolio. Investing in assets of variable liquidity can help you spread your risk, maximize your earnings, and build a stable portfolio over time.

Related Qbits

Learn everything about Q.ai Investment Kits and how they help build wealth

Level up your investment game

In just 2 minutes, iQ will help you become the expert your friends go to for investing advice.

Level Up your Investment Game
Tryq Logo






Terms of Use

Form ADV




Fintech Breakthrough Award

Best Retail Investment Company

AI Breakthrough Award

Best Deep Learning Platform

AIBenzinga Global Fintech


Product Hunt’s Golden Kitty

Semi-Finalist – Fintech

Product Hunt

#1 Product of the Day

Product Hunt

#2 Product of the Week

Q.ai is the trade name of Quantalytics Holdings, LLC Quantalytics. Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC (“QAI”), a SEC registered investment advisor. QIA’s Investment advisory services will be available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The parent company of ForbesMedia LLC, Forbes Global Media Holdings Inc. ("Forbes") has a material ownership interest in Quantalytics. Forbes does not give representation nor warranty with respect to the accuracy or completeness of the content on this website. The content on this website is for informational purposes only and does not constitute a comprehensive description of Q.ai`s investment advisory services. By using this website, you understand the information being presented is provided for informational purposes only and agree to our Terms of Use and Privacy Policy. QAI relies on information from various sources believed to be reliable, including clients and third parties, but cannot guarantee the accuracy and completeness of that information. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security. No representation or warranty can be given with respect to the accuracy or completeness of the information, and is subject to updating, revision, and amendment. Additionally, QAI or its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisors. All investing involves risk, including the possible loss of money you invest. Past performance doesn’t guarantee future performance. © 2023 Quantalytics Holdings, LLC. All Rights Reserved.

Copyright © 2023 Q.AI LLC. All rights reserved

We use cookies to provide you with the best experience and show you relevant advertising. Learn more.