In financial terminology, what does "liquidity" refer to?

Liquidity refers to the ease and speed with which an asset can be converted into cash without significantly affecting its market price. High liquidity indicates that an asset can quickly be sold in the market, while low liquidity suggests that it might take longer to sell or could require a discount to the price in order to sell quickly.

In financial markets, liquidity is crucial because it reflects the availability of cash and the ability to purchase or sell assets quickly when necessary. Investors prefer liquid assets since they can respond to market conditions and access their cash when needed.

The other options relate to different financial concepts: the total amount of capital invested in a market does not define liquidity; the cost of borrowing pertains to interest rates and associated expenses, which are separate from asset liquidity; and potential returns on investments relate to performance over time rather than the asset's convertibility to cash. Thus, the definition of liquidity is accurately captured by the idea of how quickly and easily assets can be turned into cash.