What's Happening?
Liquidity in financial markets refers to the ease with which an investment can be sold without negatively impacting its price. More liquid assets trade at a premium, while illiquid assets trade at a discount.
In accounting, a company's liquidity measures its ability to meet short-term financial obligations. Common liquidity measures include the current ratio, quick ratio, and cash ratio. These metrics help assess a company's financial health by evaluating its ability to cover short-term liabilities with available assets.
Why It's Important?
Liquidity is crucial for businesses and investors as it influences financial stability and the ability to meet obligations. High liquidity allows companies to manage short-term debts efficiently, reducing the risk of financial distress. For investors, liquidity ensures flexibility in managing portfolios and responding to market changes. Companies with strong liquidity can seize economic opportunities and withstand financial challenges, making liquidity a key indicator of financial health.
