#liquidity101
Liquidity in trading refers to how quickly and easily an asset can be bought or sold in the market without significantly affecting its price.
Key Points:
1. High Liquidity:
Assets like major stocks (e.g., Apple, Microsoft) or currencies (e.g., USD/EUR) are highly liquid.
You can enter and exit positions quickly.
Bid-ask spreads (difference between buy and sell prices) are narrow.
2. Low Liquidity:
Assets like small-cap stocks, exotic cryptocurrencies, or certain real estate are less liquid.
It’s harder to find buyers/sellers, and prices may be more volatile.
Wider bid-ask spreads.
Why Liquidity Matters:
Lower Transaction Costs: High liquidity means tighter spreads and lower slippage.
Easier Trade Execution: You can place larger orders without moving the market much.
Risk Management: It’s easier to exit a position quickly in volatile situations.
In short, liquidity affects how efficiently a market operates and is a major factor in assessing trade risk and strategy.