- Market liquidity reflects the ability of investors to purchase and sell assets at stable prices. Liquid markets allow investors to buy and sell assets quickly without experiencing a significant alteration in price for those assets. Illiquid markets generally result in a price drop when assets are purchased and sold with speed.
- Investment liquidity reflects the ability of a portfolio to be converted to cash with minimal or no loss in overall value.
- Accounting liquidity reflects the ability of an individual or organization to convert their current assets in ways that meet their current liabilities.
Boy: “I need you to pay me back tomorrow for the cookie I bought you yesterday at lunch.”
Girl: “I’ll have to talk to my mom. My assets aren’t liquid right now.”
Girl: “I’d have to break open my piggy bank to pay you back and my dad says I have to keep the bank intact for a year before I can break it.”
Boy: “Then why is all your money in your piggy bank?”
Girl: “What can I say? I’m a saver, not a spender.”
Boy: “Because you have me around to buy you cookies and stuff…?”