What is a 'Liquid Market'

A liquid market is a market with many bid and ask offers, low spreads and low volatility. In a liquid market, it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers. In a liquid market, changes in supply and demand have a relatively small impact on price. The opposite of a liquid market is called a "thin market" or an "illiquid market."

BREAKING DOWN 'Liquid Market'

The market for the stock of a Fortune 500 company would be considered a liquid market, but the market for a family-owned restaurant would not. The largest and most liquid market in the world is the forex market, where foreign currencies are traded. The U.S. dollar is the most liquid currency in this market. Nearly every central bank and institutional investor in the world holds U.S. dollars, and some foreign countries use it as an official or unofficial alternative to their local currencies or as an exchange-rate peg. The markets for the euro, yen, pound, franc and Canadian dollar are also highly liquid.

RELATED TERMS
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal ...
  2. Dollar Volume Liquidity

    A stock or exchange-traded fund's share price times its average ...
  3. Flight To Liquidity

    A situation where investors attempt to liquidate positions in ...
  4. Thin Market

    A market with a low number of buyers and sellers. Since few transactions ...
  5. Liquidity

    The degree to which an asset or security can be quickly bought ...
  6. Liquidity Cushion

    A reserve fund for a company or individual made up of highly ...
Related Articles
  1. Investing

    Understanding Liquidity Risk

    Make sure that your trades are safe by learning how to measure the liquidity risk.
  2. Investing

    Understanding Liquidity Risk

    Learn about the two types of liquidity risk: funding liquidity risk and market liquidity risk.
  3. Insights

    What is Liquidity Risk?

    Liquidity risk is the risk of being unable to sell an asset fast enough to avoid loss.
  4. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  5. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  6. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  7. Investing

    ETF Liquidity: Why It Matters

    Lower levels of liquidity in exchange-traded funds make it harder to trade them profitably.
  8. Investing

    High Yield Liquidity: High and Dry?

    Since the world’s investment banks were hit by a wave of new regulation following the 2007-09 financial crisis, the trading environment for fixed income credit has changed out of all recognition.
  9. Financial Advisor

    Why Liquidity Matters in the Corporate Bond Market

    Professional analysis and constant monitoring of liquidity risk when investing in corporate bonds is highly important.
  10. Investing

    Vanguard ETFs: 6 Thoughts on Fixed Income ETF Liquidity

    Find out whether concerns over rising interest rates and their impact on the liquidity of fixed-income exchange-traded funds are warranted.
RELATED FAQS
  1. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ... Read Answer >>
  2. Is liquidity calculated by flow?

    Read about the differences between economic liquidity, financial liquidity and asset liquidity and how each respective type ... Read Answer >>
  3. What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity ... Read Answer >>
  4. What is the difference between a bank's liquidity and its liquid assets?

    Understand the relationship between a bank's liquid assets and its liquidity and how the financial crisis demonstrated the ... Read Answer >>
  5. How much liquidity is considered too much liquidity?

    Learn about the risks of holding too much cash or investing in assets that are too liquid, and discover how liquidity is ... Read Answer >>
  6. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center