Liquidity refers to how easily an asset can be converted into cash without significantly affecting its price. Cash is considered the most liquid asset, while real estate or collectibles are less liquid because they may take longer to sell and could require price reductions to attract buyers. In financial markets, liquidity is crucial for ensuring that transactions can occur smoothly. High liquidity means that there are many buyers and sellers, making it easier to execute trades. Conversely, low liquidity can lead to larger price swings and difficulty in buying or selling assets, impacting investors' ability to manage their portfolios effectively.