Liquidity refers to what degree an asset or security can be sold or purchased in the open market without reducing the asset’s price.
The higher the demand for the asset, the easier the asset is to liquefy, thus affording a higher the degree of liquidity. High levels of trading activity usually indicate liquidity in the market. Although some analysts utilize a liquidity ratio investors do not have a specific formula to determine the degree or rate of liquidity. Many investors chose more liquid assets for a safety factor in case they need to cash out their investments quickly for other uses.