Understanding “Market Liquidity”.

What is “Market Liquidity”?

Liquidity has two aspects: Speed & Price.

An asset is said to be liquid if it can be sold off quickly without much cut in it’s price.

Like Cash is liquid because it can be used to make transactions & buy goods & services without any loss in its price.

Hence, Money/Cash is most liquid asset.

In case of Money/Cash there is no trade off between Speed & Price.

Similarly, Gold has high market liquidity because it can be sold off quickly with a slight cut in its price.

Market Liquidity_wiki

Hence, in case of Gold there is a trade off between price & speed. If you want to sell it quickly you will have to reduce its price.

Real Estate assets are less liquid than Gold as it takes much time to sell them without reducing it’s price.

## For Businessmen

Businessmen (& even Banks) have to keep money in cash (most liquid asset) in order to maintain the day-to-day operation.

P.S. In day-to-day life when you keep money in cash (not in Bank for expenditure), it’s because if you deposit in bank you will have to go to an ATM to encash the amount. 

With Great Love,

Er. Amit Yadav

http://www.stayfoolish.in

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