Which of the following statements about liquidity is true?

The correct statement is that higher liquidity means an asset can be sold quickly without significant price change. Liquidity is a measure of how easily an asset can be converted into cash without affecting its market price. When an asset is highly liquid, it implies that there are many buyers and sellers in the market, which facilitates quick transactions.

In contrast, less liquid assets may take longer to sell, and if sold quickly, they might require a significant price discount to attract buyers. This characteristic is crucial for investors who may need to access their cash quickly or who are looking to minimize their loss on sale due to market fluctuations.

Understanding liquidity is essential for all types of investors, not just those with a long-term focus. Additionally, not all assets share the same level of liquidity; for example, stocks of large, well-established companies tend to be more liquid than shares of small, niche firms. Finally, liquidity should not be confused with the profitability of an asset, as profitability concerns the earnings potential of an investment rather than its ease of trade in the market.