What does liquidity in financial markets refer to?

Liquidity in financial markets refers to the ease of converting assets to cash. It is a crucial aspect of any market because it indicates how easily an asset can be bought or sold without causing a significant impact on its price. High liquidity means that there are many buyers and sellers, allowing transactions to be completed quickly and with minimal price fluctuations. Conversely, low liquidity can make it challenging to sell an asset without a considerable decrease in its price, highlighting the importance of a liquid market for efficient trading and investment.

While availability of funds for loans, the number of investors, and market volatility can influence financial conditions, they do not define liquidity directly. Liquidity centers specifically around the speed and ease with which assets can be turned into cash, which is vital for both investors and institutions in managing their financial transactions and portfolios effectively.