What is a 'Liquid Market'

A liquid market is a market with many bids and 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. It is estimated that the daily trading volume in the currency market is over $5 trillion, which is dominated by the U.S. dollar. The markets for the euro, yen, pound, franc and Canadian dollar are also highly liquid. 

Advantages Of A Liquid Market

The main advantage of a liquid market is that investments can be easily transferred into cash at a good rate and in a timely fashion. For example, if someone owns $100,000 in U.S. Treasury bills and loses their job, the money in these Treasuries is easily accessible, and the value is known because it is a liquid market. However, on the other hand, a property is not so liquid. Because there is a finite number of buyers for a house it will take longer to sell the property, and the faster you need to sell it, the less money you will receive for it. 

Liquidity and Volatility

One significant factor that affects liquidity is volatility. Whether its correlation or causation, a market that has less liquidity is likely to be more volatile. With less interest, any shift in prices is exasperated as participants have to cross wider spreads, which in turn shifts prices further. Good examples are lightly traded commodity markets such as grains, corn, and wheat futures. 

 

 

RELATED TERMS
  1. Liquid Asset

    A liquid asset is an asset that can be turned into cash quickly ...
  2. Core Liquidity

    Cash liquidity is the cash and other financial assets that banks ...
  3. Liquidating Market

    Liquidating market is when a large group of investors all initiate ...
  4. Liquidity Risk

    Liquidity risk refers to the marketability of an investment and ...
  5. Liquidating Dividend

    A liquidating dividend is a type of payment that a corporation ...
  6. Overall Liquidity Ratio

    Overall liquidity ratio is the measurement of a company’s capacity ...
Related Articles
  1. 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.
  2. Financial Advisor

    Small-Cap Investing and 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.
  3. 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.
  4. Investing

    A Guide To ETF Liquidation

    There are a lot of ETF options, but not all have staying power. Learn what happens when an ETF fails.
  5. Investing

    Working Capital Position

    Learn how to determine a company's working capital position to correctly analyze liquidity.
  6. Investing

    The 3 biggest risks faced by international investors

    Investing internationally is a great way to diversify your portfolio, but as an investor you need to know the risks and barriers that are faced in global markets.
  7. Managing Wealth

    When Introducing Illiquidity to Your Portfolio Makes Sense

    Find out when you should consider adding illiquid investments to your portfolio, such as real estate or locked-up investment funds.
  8. Investing

    Behind Lumber Liquidators' 44% Rise in 10 Years (LL)

    Lumber Liquidators' stock rose rapidly from its IPO to its 2013 high, but slowing growth and product quality scandal caused a rapid decline in 2014 and 2015.
RELATED FAQS
  1. 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 >>
  2. Differences between liquidity and liquid assets

    Liquid assets can easily be converted into cash. Liquidity is the ability of a business to pay its debts using its liquid ... Read Answer >>
  3. What are liquid assets, and why are they beneficial to a business?

    Learn the difference between liquid and fixed assets, and how a company's liquidity affects its financial health. Read Answer >>
  4. Is it important for a company always to have a high liquidity ratio?

    Understand the significance of the liquidity ratio and how it is used in conjunction with other measures to arrive at an ... Read Answer >>
  5. Is there a downside to having a high liquidity ratio?

    Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find ... Read Answer >>
Trading Center