Time now for another edition of, “What you need to know about basic economics”. Today, we look at liquidity. Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. Liquid assets are cash, cash equivalents and other assets that can be easily converted into cash (liquidated). In the case of a market, a stock or a commodity, the extent to which there are sufficient buyers and sellers to ensure that a few buy or sell orders would not move prices very much. Some markets are highly liquid (such as cash); some are relatively illiquid (such as a collection of rare, old books). With an illiquid instrument, trying to buy or sell may change the price, if it is even possible to transact. Stocks are generally considered liquid but we have seen instances when share prices drop instantly – and price is an important component of liquidity. You may not like the price in question, and so you need to gauge whether to trade at that price or not.  Also, sharp swings in share prices can result in trading halts. Liquidity risk is the risk that a company or bank or even individuals may be unable to meet short term financial demands. This usually occurs due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process. For example, banks need to hold enough to cover expected demands from ...