What does the term 'liquidity' refer to in finance?

Liquidity in finance specifically refers to the ease with which assets can be converted into cash without significantly affecting their price. An asset is considered highly liquid if it can be sold quickly and with minimal loss in value, such as cash itself or marketable securities like stocks. Conversely, assets such as real estate or collectibles are considered less liquid because they may take longer to sell and could require significant discounts to sell quickly.

This concept is crucial for businesses and individuals alike, as maintaining an adequate level of liquidity ensures that one can meet short-term obligations and manage emergencies or unexpected expenses. Understanding liquidity is important for assessing financial health and operational efficiency.