How is liquidity best defined?

Liquidity is best defined as the ability to convert securities quickly into cash without loss in value. This concept is crucial in finance because it reflects how easily an asset can be turned into cash which is necessary for meeting immediate obligations or seizing new investment opportunities. Highly liquid assets, like government securities or stocks of large companies, can be sold readily at stable prices, allowing investors or governments to manage cash flows effectively.

When securities are liquid, they can be sold without significantly affecting their market price. This characteristic is essential in scenarios where quick access to cash is needed or where market conditions change rapidly. In contrast, illiquid assets may require a lengthy selling process and could be sold below their perceived value.

The other options do not adequately capture the essence of liquidity. For instance, the frequency of trading does not inherently relate to how easily an asset can be converted to cash. Similarly, while speed of investment and timing can influence returns, they do not address the core definition of liquidity as the ease of conversion to cash without value loss.