Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. For example, a company that is able to quickly and easily convert its inventory into cash has high liquidity. A company with slower turnover or a higher proportion of fixed assets relative to liquid assets may have difficulty meeting short-term obligations as they come due and is said to have low liquidity.There are several factors that affect an asset's liquidity, including: the nature of the asset itself, market conditions and the availability of buyers willing to purchase the asset at its current market price. In general, more liquid assets will fetch closer to their fair value in a sale than less liquid ones. Other things being equal, investors typically prefer more liquid investments since they offer greater flexibility in terms of when and how they can be sold.While high liquidity is generally seen as positive from an investor's perspective (since it provides greater flexibility), there can also be downsides – particularly for companies with large amounts of highly liquid assets on their balance sheets. For instance, if a company has too much cash on hand relative to other types of assets such as plant & equipment or patents/trademarks then this could indicate that management is not effectively deploying capital within the business.
