What does 'liquidity' in financial markets refer to?

Liquidity in financial markets refers to the ease with which assets can be converted into cash without significantly affecting their price. When an asset is liquid, it can be quickly sold or bought in the market, allowing investors to quickly access cash when needed. This characteristic is crucial for investors who may want to meet immediate financial obligations or take advantage of new investment opportunities.

For instance, cash itself is the most liquid asset, while real estate is generally considered much less liquid due to the longer time it often takes to sell a property. Investors prefer liquid markets because they provide more flexibility and reduced risk of loss associated with the inability to sell an asset promptly at a fair price.

The other choices relate to different aspects of financial markets but do not capture the essence of liquidity. Profitability deals with returns on investments, while transaction frequency pertains to market activity levels. Market capital refers to the total value of an asset class, none of which define liquidity's core concept.