What does liquidity of an investment refer to?

Liquidity of an investment refers to the ease with which it can be converted into cash without significantly affecting its price. This concept is crucial for investors as it indicates how quickly they can access funds if needed. If an investment is highly liquid, it means that there are many buyers and sellers in the market, making it simple to sell the asset quickly.

For example, publicly traded stocks are typically considered liquid investments because they can be sold on the stock market at any time during trading hours. On the other hand, real estate or collectibles may take longer to sell and may not sell at a desirable price, making them less liquid.

Understanding liquidity helps investors make informed decisions about where to allocate their assets based on their need for cash flow or their investment strategies.