Definition
Liquidity measures how quickly and easily an asset can be converted to cash at a fair market price. High liquidity means tight bid-ask spreads, high trading volume, and minimal price impact for trades. Liquid markets have many buyers and sellers, making it easy to enter and exit positions. Low liquidity leads to wider spreads, potential slippage, and difficulty executing large orders. Liquidity is crucial for traders and can vary significantly between securities and market conditions.
Example
Apple stock trades millions of shares daily with a $0.01 spread - highly liquid. A small-cap stock might trade 10,000 shares daily with a $0.50 spread - less liquid. During market crashes, even normally liquid stocks can become illiquid.
FAQ
What is Liquidity?
The ease with which an asset can be bought or sold without significantly affecting its price.
Why is Liquidity important?
Liquidity helps investors evaluate market structure and make more informed decisions.