What is market liquidity and why is it important?
What is liquidity?
Liquidity describes the extent to which an asset can be bought and sold quickly, and at stable prices. In simple terms, it is a measure of how many buyers and sellers are present, and whether transactions can take place easily.
How is liquidity calculated?
Usually, liquidity is calculated by taking the volume of trades or the volume of pending trades currently on the market.
Why is liquidity important?
Market liquidity is important for a number of reasons, but primarily because it impacts how quickly you can open and close positions. A liquid market is generally associated with less risk, as there is usually always someone willing to take the other side of a given position. This can attract speculators and investors to the market, which adds to the favourable market conditions.
In a liquid market, a seller will quickly find a buyer without having to cut the price of the asset to make it attractive. And conversely a buyer won’t have to pay an increased amount to secure the asset they want.
Advantages of high liquidity
How liquidity changes?
High levels of liquidity arise when there is a significant level of trading activity and when there is both high supply and demand for an asset, as it is easier to find a buyer or seller. If there are only a few market participants, trading infrequently, it is said to be an illiquid market or to have low liquidity.
Who provides liquidity?
A liquidity provider by definition is someone who provides liquidity. The liquidity provider acts at both ends of currency transactions. He sells and buys a particular asset at certain prices. It means that he is making the market.
To Understand more about market maker, Read below
