The ease with wich an asset can be exchanged for money. The liquidity of an asset is determined by the nature of the market on which it is traded. For example, shares in a company are liquid because there is a well-organized market on which they can be bought and sold, and so within a quite short time exchanged for cash. A house, on the other hand, tends to be illiquid, since it can take some time and effort to sell, even when demand for houses may be fairly strong. The term may also be applied to an institution or individual; a firm is said to be liquid if a high proportion of its assets are held in the form of money or very liquid assets. The extent of the firm’s liquidity in this sense then gives an indication of its ability to meet its expenditures quicly enough to satisfy creditors and avoid bankruptcy.
Reference: The Penguin Dictionary of Economics, 3rd edt.