In the context of financial markets, what does 'liquidity' refer to?

Liquidity in financial markets describes the ease with which an asset can be converted into cash without significantly affecting its market price. This concept is crucial because it indicates how quickly an investor can access cash if needed. An asset with high liquidity, such as stocks or government bonds, can be rapidly sold in the market with minimal price fluctuations.

In contrast, assets with low liquidity, such as real estate or collectibles, may take longer to sell and may require a price reduction to attract buyers. Thus, the ability to convert an asset into cash quickly is a central feature of liquidity, making the first choice the most accurate description within the context of the question.