How quickly and easily an asset can be converted to cash without losing value.
Liquidity measures how quickly and easily an asset can be sold for cash at or near market value. Cash is the most liquid asset; real estate is illiquid (selling a home takes months and incurs transaction costs). Stocks and bonds are liquid because they can be sold in minutes during market hours. Understanding liquidity is important for financial planning: keep easily accessible funds for emergencies, but invest long-term money in less liquid but potentially higher-returning assets. Illiquid investments (real estate, private equity) often offer higher returns as compensation for illiquidity and longer holding periods. Lack of liquidity can be problematic if you suddenly need cash and are forced to sell at disadvantageous prices.