#Liquidity101

What is Liquidity in Trading?

Liquidity refers to how easily an asset can be bought or sold in the market without significantly affecting its price. A highly liquid asset has a large number of buyers and sellers, allowing for quick transactions at stable prices. Examples include major currency pairs (like EUR/USD) and large-cap stocks (such as Apple or Microsoft).

Key Aspects of Liquidity:

- Tight Spreads – Liquid markets have small bid-ask spreads, reducing trading costs.

- High Volume – More trading activity means orders are filled faster.

- Price Stability – Less slippage occurs because large orders don’t drastically move prices.

Why It Matters:

- Traders prefer liquid markets for efficient entry and exit.

- Illiquid assets (like penny stocks) can be risky, as selling them quickly may require price concessions.

In summary, liquidity ensures smoother, more predictable trading, making it a crucial factor for traders and investors.