What Is Market Liquidity?

Chapter 1: Introduction

Liquidity is a classic market term, and people often discuss "how liquid is a market?" And "What about liquidity? "Wait for the topic.

Simply put, market liquidity refers to the speed at which an asset is traded, sold or sold twice.

Chapter 2: Flow and Non-Flow

In layman's terms, high cash liquidity is the strongest investment vehicle. On the contrary, the weakest liquidity is stolen paintings. Everyone who paid a lot of money to buy Turner or Picasso knows that these treasures are difficult to resell.

Surprisingly, property is arguably the least liquid. Bricks or mortar cannot be delivered quickly because real estate transactions require both buyers and sellers to complete investigations and other necessary legal procedures, all of which need to be done step by step and are time-consuming and laborious.

Other non-current assets:

• Classic car

• Race horses

• Refined wine

• Complex financial instruments, such as derivatives

• Stocks involved in complex overseas operations

In contrast, selling shares or shares of Apple or Unilever is much simpler and easier.

Chapter 3: How Liquidity Are Gold and Silver?

In theory, such commodities should be easier to sell. However, spreads (the profits made by trading brokers) are usually wider (larger). Not many investors actually have a lot of precious metals in the gold or silver market.

Therefore, if it is not for the lucky precious metals investors, the cost of selling gold and silver will be higher in the case of non-economies of scale, at least higher than the cost of selling shares.

Note that when stock prices in mainstream global markets rise, the prices of commodities (e. G., gold and silver) fall accordingly, which also leads to weaker and weaker liquidity in gold and silver.

Chapter 4: How Much Does Liquidity Affect Investments?

Mobility is extremely important. Let's get an overview of how important financial liquidity is in investing or the stock market:

"Strong" liquidity generally refers to high trading volumes and low price spreads (or cost of sales). For example, let's look at "defensive" or "safe" stocks. For the sake of discussion, let's take the example of a fictitious company, National hard flooring (NSF). The NSF company, based in the UK, has grown steadily since its inception in 1950, with a share price of £ 10.

The asking price for NSF shares is £ 10 and the bid price is £ 9.97, with a bid-ask spread of 3 p or 0.29%.

The other company's stock is slightly less liquid. NLLS, which went public in 2003, plans to start operations in Asia, which is likely to cause strong stock market volatility.

The asking price of NLLS share price e is 1 pound, the bid price is 97 p, and the bid-ask spread is 3 p. However, in terms of the overall percentage, the actual spread has widened to 3%.

Don't forget that other broker commission fees will be added to this 3% cost, which will end up being paid for by the investor-you. In other words, liquidity is very... very important!