How is liquidity best defined in financial terms?

Liquidity in financial terms refers to the ease and speed with which an asset can be converted into cash without significantly affecting its market price. When an investment is highly liquid, it can be sold quickly with minimal transaction costs, making it readily available for use. This concept is crucial for investors and financial managers, as it directly impacts their ability to access cash when needed.

In markets, cash is considered the most liquid asset, while real estate or collectibles might be seen as less liquid due to longer timeframe and higher costs involved in selling them. Therefore, defining liquidity as the ease with which an investment may be converted to cash captures the essence of what makes an asset liquid.