What role does liquidity play in investment?

Liquidity is a vital concept in investment management as it describes how easily an asset can be bought or sold in the market without causing a significant impact on its price. High liquidity means that the asset can be quickly sold for cash at or near its market value, which is particularly important for investors who may need to access cash quickly or who want to make timely decisions based on market movements.

In financial markets, assets like stocks of large companies typically exhibit high liquidity due to the presence of many buyers and sellers, allowing for quick transactions. Conversely, assets that are less frequently traded, like certain real estate properties or niche collectibles, may demonstrate lower liquidity, making it harder and potentially more costly to sell them.

Understanding liquidity helps investors manage risk and ensure that they can access capital when needed. This awareness of liquidity contributes substantially to forming and executing an effective investment strategy.