Define liquidity in financial terms.

Liquidity, in financial terms, refers to the ease with which an asset can be converted into cash without significantly affecting its market value. This concept is crucial for individuals and businesses alike, as it indicates how quickly they can access cash when needed for operational expenses or unforeseen financial obligations. High liquidity means that assets can be readily sold or converted to cash, while low liquidity indicates that it may take longer to sell an asset or that it might require a discount to sell quickly.

In financial markets, cash is considered the most liquid asset, followed by marketable securities and then by physical assets like real estate or collectibles, which often take longer to sell and may incur transaction costs. Understanding liquidity helps investors make informed decisions about their portfolios, ensuring that they maintain a balance between holding liquid assets for immediate needs and investing in less liquid assets for higher potential returns.