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The ease with which an asset can be converted into cash quickly without significantly affecting its market price.
Cash is the most liquid asset. Large-cap stocks listed on major exchanges are highly liquid, with billions of dollars traded daily. Real estate, private equity, and small-cap stocks are relatively illiquid, meaning they may take time to sell or may require price concessions. Liquidity matters because it affects your ability to exit positions when needed and impacts the spread between bid and ask prices. During market crises, liquidity can evaporate rapidly as buyers disappear, causing prices to plunge. The liquidity premium is the extra return investors demand for holding less liquid assets.