Liquidity is an economic term denoting the ability of assets to be quickly sold at a price close to the market.
The economists distinguish “highly liquid”, “low liquid” and “illiquid” values (assets). The easier and faster it is possible to exchange an asset taking into account its full value, the “more liquid” it is. For the product, liquidity will correspond to the rate at which it is sold at a nominal price, without additional discounts.
For example, the assets of the enterprise, reflected in the balance sheet, have different liquidity (in descending order):
- Cash in the accounts and in the cash desks of the enterprise;
- The bank bills, government securities;
- The current receivables, loans issued, corporate securities (shares of listed companies, bills of exchange);
- The stocks of goods and raw materials in warehouses;
- The machinery and equipment;
- The buildings and constructions;
- The constructions in process of building.
The term “liquidity” also relates to banks, enterprises (firms), the market, securities, etc. The meaning for these subjects differs:
- The liquidity of the enterprise is its ability to repay the short-term debts after the sale of assets on time.
- The liquid market is one within which the subjects regularly make deals. In addition, the demand price and the offer price don’t differ much from each other.
- Money has a high liquidity – this is their main advantage.
- Liquidity of securities is the speed of their sale or purchase on the stock market at a real market price.
In a broad sense, the liquidity is an indicator of efficiency, turnover, and mobility. Liquid assets are easily converted into cash, a liquid company can easily be settled with creditors, liquid securities – are quickly sold and bought.