I’ve been getting into finance, stonks and crypto lately and I love researching and learning. But one word I’ve never fully understood is “liquidity”.
What is it?
Does it mean cash?
Does it mean a bunch of stocks?
Is it a noun, an adjective?
What does it mean to provide liquidity?
What does it mean to liquidate?
What does it mean to be solvent/insolvent?
I’ve looked on many different articles and sources and I still can’t find a way of thinking about it that makes sense in all uses of the word
In: 7
Liquidity is how quickly an asset you possess can be turned into cash for immediate use. Cash is obviously the most liquid since you can transfer and spend funds in a bank account immediately.
Stocks are considered good liquidity because you can sell stocks and have the cash in your account in 3 days.
What about your house? It isn’t very liquid since you have to put it on the market snd that can take a while. So if you need money quickly, this won’t help you…assuming you want full value of it and not giving it at a discount.
Liquidate is to completely turn an asset into cash.
You own 10 shares of a company? You sell 10 shares? You’ve liquidated. Sell a car? You liquidated your car.
You sell the house? Liquidated that asset as you no longer have it, and instead have cash.
Also, how liquid something is relative to how quickly you need the cash. Let’s say you own a Rolex worth 15k. You could try and sell it for 15k but that will take some time. If you’re in a hurry you could sell it for 100 dollars and someone will buy it instantly. Selling the house for a million? Takes time. Sell for 100,000..quick but not full market value.
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