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Liquidity refers to the ability of a business (or person) to quickly convert assets and holdings into cash. Liquidity refers to the ease with which such transactions can be completed without a loss in the value of the asset.
If a business does not have assets that are liquid, if unexpected expenses arise, the company may suffer from its inability to meet these expenses because fixed assets cannot easily be turned into cash.
Liquid assets may be blue chip stocks, which hold a strong value over time and regularly have a high trade volume, and are very often money market instruments, such as U.S Treasury bills or certificates of deposit (CDs). The idea is that when an asset is sold, it must maintain its value. Investopedia defines liquidity as:
The degree to which an asset or security can be bought or sold in the [financial] market without affecting the asset's price. Liquidity is characterized by a high level of [instrument] trading activity. Assets that can by easily bought or sold, are known as liquid assets.
Investopedia also explains that liquidity is the "marketability" of a liquid asset that can quickly be converted to cash.
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