Definition of Liquidity

• Widely Accepted Definition: A liquid market allows participants to conduct large transactions quickly with little impact on prices. This means that there are enough buy and sell quotes in the market, with narrow spreads, enabling investors to expect to complete transactions at average prices close to the current market price over a longer period.

• Definition by Black (1971): Liquidity is the ability to convert stock assets into cash and vice versa, involving the execution costs of the process of monetization or security conversion. A liquid market has a faster and lower-cost process for monetization or security conversion.

Measuring Liquidity

• Trading Volume: Liquidity can be measured by the size of trading volume. In a liquid market, the premium (discount) required for conducting transactions of the same size is smaller.

• Price Volatility: In a liquid market, the impact of trades on prices is smaller, and price volatility is not significant.

• Trade Wait Time: In a liquid market, completing a transaction typically requires a shorter wait time.