$$ Investing and Money Glossary, terms and definitions.

Liquidity

Cash and assets easily converted to cash are liquid assets, and liquidity is the extent to which an individual or firm can produce cash when necessary. A high degree of liquidity implies that a company isn't immediately going to fail in the event of a downturn in its business or the economy. That means increased safety for investors, but it comes at a price: cash and cash-like assets usually produce the lowest returns. Thus, a company sitting on a large pot of cash suffers reduced profitability compared to a similar company with all its assets brought to bear on its profitable business activities.