Liquidation in trading and crypto lending is covered in full under forced liquidation, which explains when a broker, exchange or protocol closes a position, how liquidation prices are set and how traders can avoid them. This page sets out the main meanings of the single word.
In leveraged trading, liquidation happens when losses eat into a trader's collateral until it falls below the required maintenance level. If the trader does not add funds after a margin call, or if the market moves too fast, the platform sells the position to repay what is owed. Crypto exchanges do this automatically, and traders often limit the damage with isolated margin. In DeFi, a loan from a lending pool is liquidated when the value of its collateral drops below a set ratio; outside parties repay part of the debt and receive collateral at a discount.
In company law, liquidation means something different: winding up a company, selling its assets, paying creditors in order of priority and dissolving the business. It usually follows insolvency, though solvent companies can also be wound up voluntarily. Investors may also speak of "liquidating" a holding simply to mean selling it for cash. The common thread is turning assets into money, but the legal process, the parties involved and the consequences differ greatly between the meanings.