Liquidity 101 refers to the basic understanding of liquidity in financial markets—a key concept every trader and investor should grasp. Liquidity describes how easily an asset can be bought or sold in the market without affecting its price. Highly liquid assets, such as major stocks or currencies, can be quickly traded with minimal price changes. In contrast, illiquid assets may take longer to sell and may require sellers to accept lower prices. Liquidity is crucial because it affects the speed and cost of transactions. For example, a liquid market provides tighter spreads (the difference between bid and ask prices), more accurate pricing, and less risk of slippage. Investors prefer liquid assets during volatile times because they can quickly enter or exit positions. Market liquidity is influenced by trading volume, number of participants, and market depth. Understanding liquidity helps traders plan better strategies and manage risks more effectively. Whether you're investing short-term or long-term, liquidity plays a vital role in overall portfolio performance.
