How is 'liquidity' defined in investment terms?

Liquidity in investment terms refers specifically to the speed at which an asset can be sold for cash without significantly affecting its price. This concept is crucial for investors as it impacts their ability to quickly access funds when needed or to execute trades efficiently. A highly liquid asset can be converted to cash quickly, allowing investors to take advantage of opportunities or manage their financial obligations without delay.

For instance, cash is considered the most liquid asset because it can be used immediately, while real estate is less liquid since selling it may take time and may require the seller to possibly negotiate price reductions to facilitate a quick sale. Understanding liquidity helps investors assess the risks associated with their investments and plan their strategies accordingly.