From Traderpedia

Definition: The ability of an asset to be easily converted into cash. Also, the ability of the market to absorb a reasonable amount of trading at reasonable price changes.

Liquidity is a function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread and large orders will be absorbed easily by other participants. In an illiquid, or "thin" market, a large order cause a sudden price spike as several levels of bids/offers are absorbed. Most traders prefer to trade in liquidf makrets because they can be more certain of exiting at their desired price. The S&P 500 futures market is an example of a liquid market.

Liquidity also refers to how easily investors can convert their securities into cash and refers to a corporation's cash position, ie how much the value of current assets exceed current liabilities.