What is liquidity?

Liquidity refers to the ease of converting assets into cash. High liquidity means there is an abundance of buyers and sellers for an asset, which makes it easy to complete trades. Low liquidity, or illiquid markets, have low numbers of buyers and sellers, making it harder to complete trades.

A real world example could be someone owning a highly sought-after vintage car worth £20,000. Because there are plenty of potential buyers, a seller should be able to quickly exchange the car for the £20,000 of liquidity. 

Another example is someone else owning a vintage stamp collection also worth £20,000. Because stamps are generally less popular than cars, it will likely take the holder of the stamps a longer to find a buyer, making the asset less liquid.