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Liquidity is the ability to transform a financial asset into money in the short term without reducing its price.

Liquidity is one of the elements that define investment risk. When valuing an investment, liquidity is how quickly you will be able to sell that asset. The more liquid an investment is, the lower its risk because the clearer the value at which you can get it back.

For example, a share is very liquid because you can sell it at the price it is currently trading at, and the transaction will be executed instantly. On the other hand, a house is an illiquid investment because it takes a long time from the time you put it up for sale until the transaction closes, and in that period of time the value of the house may have decreased. Something similar happens with products such as pension plans, which can only be withdrawn under certain circumstances.

The term liquidity or liquid assets also refers to the part of an investment portfolio that remains uninvested while waiting for investment opportunities.