Liquidity is defined as the ability to trade large size quickly at a low cost. It is one of the most important characteristics of a market. A liquid market allows traders to implement their strategies cheaply, normally with a limited bid/ask spread. A liquid market is characterized by high volume. It is generally less volatile than an illiquid market.
Usually, you can refer to three dimensions of liquidity - time, size and cost:
• “Immediacy” refers to how quickly you can execute a trade of a given size at a given cost.
• Width refers to the cost of executing a trade of a given size, including commissions.
• Depth refers to the size of a trade that can be executed at a given cost. Width and depth are very strictly related.
A liquid market is a market where you can trade large size quickly at low cost. Liquidity refers to how quickly you can convert your assets into cash.  Liquidation is the conversion of assets into cash by an Investor getting rid of a position in a particular type of security. 
For example, a portfolio manager might decide to liquidate a position in a stock by selling all the shares of that stock held in the portfolio.