ISSUE #1: LIQUIDITY
The term “liquidity” is first recorded as used in the English language from the early 17th Century. It is derived from the French word “liquidité” and from the Medevial Latin “lliquiditas” or “liquiditatem”. The modern Latin usage is “liquidus”.
Liquidity refers to the rate at which asset can be converted into cash. It describes the degree to which an asset can be quickly bought and sold in the market at a price reflecting its intrinsic value.
Liquidity is the amount that is readily available for investment and spending. It is the ability to be able to convert any asset into cash quickly.
Conversely, an asset is illiquid or non-liquid if it cannot be converted quickly into cash. For example, the shares of a private company and other debt instruments and other tangible assets such as real estate, fine arts etc. are nearly all relatively illiquid.
Examples of Liquid Assets
Cash is universally recognised as the most liquid asset. It also consists of shares of quoted public companies, treasury bills, notes, bonds and other assets that can be sold quickly. There is also a great deal of subjectivity involved in determining how liquid an asset is. This depends on location, economic condition, government regulation, the general practice of a custom or trade etc.
High and Low Liquidity
High liquidity occurs when there are a lot of these assets. Low or tight liquidity is when cash is tied up in non-liquid assets.
There are other circumstances and other modes in which the term liquidity is used. You can read up to find out more. Remember, the purpose of Finance “Yoga” is to introduce you to finance terms as they are used basically.
Stay tuned for the next issue of Finance “Yoga”.
Emmanuel Inyada is a Lagos based legal practitioner with growing experience in dispute resolution, energy and finance law. He is the Co-founder of Law Axis 360°. You can reach him at email@example.com.