What is liquidity & how does it work?

All you need to know about liquidity, a market dynamic that describes how easily you can sell something. What Is Liquidity? Liquidity refers to the ease with which a security or asset can be converted into cash. A truly liquid asset can be converted into cash without its value dropping significantly. Therefore, the most liquid asset is cash itself.

What does high market liquidity mean?

High market liquidity means that there is a high supply and a high demand for an asset and that there will always be sellers and buyers for that asset. If someone wants to sell an asset yet there is no one to buy it, then it cannot be liquid. Liquidity is not the same thing as profitability.

What does low liquidity mean?

Low or tight liquidity occurs when cash is tied up in non-liquid assets, or when interest rates are high, since that makes borrowing cost more. High liquidity also means there's a lot of financial capital. Financial capital, or wealth, or net worth is the difference between assets and liabilities.

What does restricted liquidity mean?

Constrained liquidity is the opposite of a liquidity glut. It means there isn't a lot of capital available, or that it's expensive, usually as a result of high-interest rates. It can also happen when banks and other lenders are hesitant about making loans. Banks become risk-averse when they already have a lot of bad loans on their books.