Liquidity in the term is used to define the ability to sell or buy an asset without causing a major impact on the market price. It also ties into the idea of ??how easy it is to convert assets into fiat currency. Property or assets that are difficult to convert to cash are illiquid, while properties that can be converted immediately are considered liquid assets.
A market is considered liquid when a trader or investor can immediately sell or buy a particular asset, meaning that there is always a counterparty willing to trade. On the other hand, a market that is not considered liquid will require the trader to wait longer until the order is finally executed.
This means that traders often look to liquid markets, so they can buy and sell financial instruments in an efficient manner – without having to wait too long or accept unfair prices. Therefore, a liquid market is one that presents a high volume of trading activity as well as a reasonable (not too large) spread between supply and demand orders. Binance, for example, has a liquid Bitcoin market because there are always traders willing to buy or sell BTC, and the bid-ask spread is usually very small.
Another context in which liquidity can be used is in accounting, where the term accounting liquidity refers to a borrower’s ability to pay his debts on time. Therefore, a company is considered liquid when it is able to pay its loans and debts without problems.
Items on a company’s balance sheet are usually listed from the most liquid. Therefore, cash is always listed at the top of assets, while other types of assets, such as Property, Plant & Equipment (PP&E), are last in line.
In finance and accounting, the concept of a company’s liquidity is its ability to meet its financial obligations. The most common liquidity measures are:
- Current Ratio – Current assets minus current liabilities
- Quick Ratio – The ratio of only the most liquid assets (cash, receivables, etc.) to current liabilities
- Ratio of Cash – Cash on hand relative to current liabilities