#Liquidity101

Market liquidity refers to how easily an asset can be bought or sold in the market without significantly affecting its price. Think of it like this: if you want to sell a car, and there are many interested buyers willing to pay a fair price, your car is highly liquid. If there are few buyers and you have to drastically drop the price to sell it, it's illiquid.

In trading, high liquidity means there are many buyers and sellers, leading to tight "bid-ask spreads" (the small difference between the highest price a buyer will pay and the lowest price a seller will accept). This allows traders to enter and exit positions quickly at fair prices, minimizing price fluctuations. Conversely, low liquidity can result in wider spreads, higher trading costs, and difficulty executing trades, especially for larger orders, potentially causing significant price swings. Understanding liquidity is crucial for managing risk and making informed trading decisions.

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