#Liquidity101

Why is liquidity important?

Liquidity is very vital to financial markets because it indicates:

Stability-

The higher the market liquidity, the more stable that market is. For example, let’s say that you are selling Bitcoin. The market is highly liquid in that there is always a willing buyer and a willing seller, which reduces the impact on the market value. This not only makes Bitcoin stable but also makes its entire market stable with time.

Less risk of price manipulation-

The markets are constantly under scrutiny over manipulation as significant players look for ways to manipulate prices to earn huge returns. However, price manipulation is only possible in an illiquid market where market makers can easily control prices to their own benefit. However, this is highly unlikely in a highly liquid market.

Lower transaction time-

Let’s refer back to our example. If the person needed to buy the car for an emergency, this was not possible because selling the painting would have taken a long time. However, in a highly liquid market, orders are filled at a fast rate, which is convenient and advantageous to investors who trade regularly.