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Finance Glossary

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Liquidity

Definition:

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.