What does the term "liquidity" refer to in finance?

Liquidity in finance specifically refers to the ease with which an asset can be converted into cash without significantly affecting its price. This concept is crucial because it indicates how readily an investment can be sold in the market and how quickly funds can be accessed when needed.

Assets that are highly liquid, like cash and publicly traded stocks, can be sold quickly at or near their market value, making it easy for investors to access their funds. Conversely, less liquid assets, such as real estate or collectibles, may take longer to sell and might require a price discount to attract a buyer quickly.

While stability of an asset's price and the profitability of an investment are important considerations in finance, they do not directly define liquidity. The amount of cash a company holds, although related to the concept of liquidity, is not synonymous with the term itself, as liquidity also encompasses other easily convertible assets beyond just cash holdings.