🌰 In a nutshell: Liquidity is how easy it is to get cash.
📦 Unpack that a bit: How quickly can you buy or sell something at a price that reflects its value. If you buy a teddy bear for a dollar today and you can sell it for a dollar tomorrow, that’s a very liquid asset. If no one wants to buy that bear tomorrow, or if you have to sell it for 50 cents, it has low liquidity. Market liquidity describes this at scale: How easy it is for all of us to trade assets — be they stocks, bonds, or stuffed animals — with one another.
👶 Tell your toddler: “Water, milk and juice are liquids, meaning you can easily pour them into a cup. Liquidity describes things that flow easily. When we talk about money being liquid, we mean it’s easy to move it from one cup to another.”
👊Why liquidity matters:
“One person’s spending is another person’s income. That, in a single sentence, is what the $87 trillion global economy is,” explains Neil Irwin in The New York Times. So when money stops flowing — when liquidity dries up — the economy stops.
🔀 See also: Stock Market, Liquidity Trap