The term liquidity is one of the fundamental concepts in the world of trading and investment, and it refers to how easily and quickly a financial asset can be converted into cash without significantly affecting its price.

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✅ Simplified Explanation:

High liquidity: the asset can be sold quickly at a price close to the market price (example: the US dollar or large stocks like Apple).

Low liquidity: the asset is difficult to sell quickly without lowering its price (example: real estate or some small cryptocurrencies).

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🧠 Types of Liquidity:

1. Market Liquidity

The market's ability to absorb buy and sell orders without significant price fluctuations.

2. Accounting Liquidity

The company's ability to cover its short-term financial obligations using its liquid assets.

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📊 Importance of Liquidity in Trading:

Facilitates quick entry and exit from trades.

Reduces the difference between the buying and selling price (Bid-Ask Spread).

Markets with high liquidity are considered more stable and less volatile.

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📉 Risks of Lack of Liquidity:

Difficult to sell the asset at the desired price.

Increased volatility and price fluctuations.

Risk of capital being frozen for a longer period.