Over 700 finance terms, Shmooped to perfection.
Liquidity is the ability to convert an asset into cash. Generally speaking, an enormous 30,000 square foot mansion in Idaho is not very liquid – there just aren’t that many buyers so it might take years to sell. But a small home in Palo Alto is almost always liquid – at the right price – as there are always tons of buyers of a 2,800 square foot ranch home. Liquidity applies to stocks as well – Microsoft shares trade in the tens of millions per day; other small caps have days where only a few thousand shares trade. So if you own 100,000 shares of that small cap and need to get out, you’ll pay a dear price as the stock craters on your volume trying to get liquid in a security that ain’t.