Booyah Breakdown: Liquidity

"The market is liquidity driven."

"The push in the market today was clearly because of the liquidity."

Huh? Why are all the pundits blaming liquidity? Is it high tide? Are they all having liquid lunches and trading drunk?

What is liquidity and why is everyone attributing this current market to it?

Well, we're going to decode that pundit-speak -- and will pretend to do it with a martini in hand, while watching the ocean (because that sounded really dreamy).

Dissecting the Juice

Liquidity is the ability to convert an asset into cash. If you can do it quickly, the asset is very liquid. If you can't, the asset is illiquid.

So your money market account is very liquid because you can withdraw the cash and take off for Tahiti in an hour. Your yellow Ferrari F430 convertible Spider, on the other hand, could take a while to sell. Oh sure, there'd be plenty of us on line to buy it, (me first!) but coming up with a buyer who has enough cash to actually take it home will be your challenge. So the car, while simply gorgeous, is illiquid.

The same concept applies to the stock market. If you're selling a highly traded stock, like Altria (MO) or Microsoft (MSFT), then you'll be able to get your selling price and cash very quickly. But if you're dabbling in those little over-the-counter stocks, a buyer is going to be harder to find.