How finance folk use it
In investing, liquidity refers to how easily an asset can be converted to cash. Investments that can quickly be exchanged with money without losing their value are said to be highly liquid, and are also known as liquid assets.
Assets that are commonly described as liquid include cash, savings accounts, and money market instruments.
Is it good or bad?
Liquidity can be very useful when you need to convert the asset to cash quickly while keeping the value intact.
When in your portfolio, liquid assets can also give you some measure of security because they can be used to pay for transactions in case you need them. However, this isn’t the only characteristic of an asset that will help you see if you should invest in it.
What it means for you
With the ease of which they can be made cash, liquid assets can play an important role in your investing journey. That makes them a significant consideration when planning your portfolio’s asset allocation.
Aside from the liquidity, remember that you should also be looking at the asset’s risk suitability and recommended time horizon to see if they match your goals and situation.