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- 1 Understanding is the fundamental step before plunging deeper into investments.
- 2 There are different factors that impact liquidity and its availability to businesses and individuals.
- 3 Experts, thus, give insights into liquidity that help market participants understand it better.
In simple words, liquidity is the availability of cash. However, the presence of assets or securities convertible to cash comes in its ambit. For all obvious reasons, it is important for businesses as well as the economy. The accessibility to cash empowers businesses and countries to make bold decisions. It enables them to plan the future and sustain losses.
Insights Into Liquidity
As mentioned above, liquidity refers to the level of ease of turning assets into cash. It includes the intrinsic value of those items. Besides cash, one also considers tangible assets like real estate, chattels, stocks, and other investment instruments liquid. It even comprises partnership units, fine arts, and collectibles. It can be easily understood with an exchange scenario too.
Each asset and investment has its financial value. However, the ease of their convertibility into cash makes them less liquid. For example, a building owned by a company is an asset. It has its intrinsic value but converting it into cash may not be that easy. On the other hand, inventory and stocks that can be readily sold are more liquid. It’s important to note that unexpected events can happen and obstruct this process.
Every financial entity assesses its liquidity on a timely basis. It helps them determine their fiscal health and performance too. At this time, one must also go through the types of liquidity.
Liquidity in Market
It refers to the market’s capacity to access cash. It involves the availability of assets that can be bought and sold at a certain price. Furthermore, it gets split into different types of markets too. For example, a stock market or a real estate market. Based on the volume of trade, an exchange can ascertain its liquidity. For a real estate market, it’s the dispensable property that can bring cash quickly.
In this case, the investors will also have to evaluate the unrealized gains. Some peculiar instances indicate the presence of liquidity. One such example is the condition of bid and ask prices in an exchange environment. When it tightens, the market is liquid. But when it loosens, the market is illiquid. Moreover, some inherent conditions also matter here. For instance, the stock market is generally more liquid than the real estate market.
Liquidity in Accounting
This one relates to a businesses’ or an individual’s capacity to meet their financial obligations. It factors in the assets that can be quickly sold off to eke out cash. Professional analysts compare current liabilities with liquid assets to reckon liquidity. They also factor in the financial obligations needed to be met that year. In addition, there are different ratios that one can deploy to measure accounting liquidity.
Conclusion
With the knowledge of liquidity, it is easier for everyone to deal with investments. It helps them assess their capacity to take or shed risks. It also helps them strategize and streamline the next moves of business. Once they know how to measure liquidity, they can be certain about market conditions too. All in all, it’s empowering for companies and individuals.
Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.
