Market Liquidity
Market liquidity is a business, economics or investment term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.
A liquid asset can be sold (1) rapidly, (2) with minimum loss of value, (3) anytime within market hours. The characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. An elegant definition of liquidity is also the probability that the next trade is executed at a price equal to the last one. Such scenarios arise when there are many buyers and sellers and this will not affect the price at that particular moment.
The liquidity of a product can be measured as how often it is bought and sold, this is known as volume in stock market. Often investments in liquid markets such as the stock exchange or futures markets are considered to be more liquid than investments such as real estate, based on their ability to be converted quickly. Some assets with liquid secondary markets may be more advantageous to own, are willing to pay a higher price for the asset than for comparable assets without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such assets, like the difference between newly issued.
Speculators and market makers are key contributors to the liquidity of a market, or asset. Speculators and market makers are individuals or institutions that seek to profit from anticipated increases or decreases in a particular market prices. By doing this, they provide the capital needed to facilitate the liquidity.