There are two aspects of liquidity:
A. How readily an asset can be turned into cash (the ease with which buyers and sellers can be brought together and can agree on a price) is called liquidity.
An important consideration in assessing risk is how liquid various financial assets are. Therefore, assets that are less liquid tend to have a wider spread between the “bid” (the price offered by a would-be buyer) and the “ask” (the seller’s asking price).
Cash Is King!
You need cash and liquidity for freedom and security. The cash in reserve provides money for not only emergencies but opportunities as well.
A cash reserve provides the foundation for your entire financial position. You should get your cash reserve in order before taking on any risky investments with money you can not afford to lose!
Boring but Prudent!
Five to six months “salary or seven to eight months” expenses are guidelines generally considered reasonable for emergency reserve funds.
B. An important factor when choosing which stocks to buy is liquidity.
This type of liquidity is best measured with volume. Higher the average daily volume is, higher the liquidity is.
High liquidity ensures that at the moment when we want to buy or sell shares, there will be enough sellers or buyers on the other side of the fence!