Market Liquidity
What It Is
Market liquidity refers to how easily assets can be bought or sold without significantly affecting their price.
Why It Matters
High liquidity supports efficient markets, tight spreads, and stable pricing. Low liquidity increases volatility and transaction costs.
How It Works
- More buyers and sellers → higher liquidity
- Fewer participants → lower liquidity
- Influenced by market conditions, news, and economic cycles
Key Components
- Trading volume
- Order book depth
- Bid‑ask spreads
- Market participation
Example
Large‑cap stocks typically have high liquidity, while small‑cap or thinly traded assets may have wide spreads and low volume.
Key Takeaways
- Liquidity is essential for efficient markets.
- It varies across assets and market conditions.
- Liquidity risk can amplify losses during stress.