- Liquid markets have many available buyers and sellers where prices change in comparatively small increments
- Liquid markets make it quick and efficient for buyers and sellers to trade in and out of securities with tight spreads and low transaction costs
- Liquid markets include the money market, the market for Treasuries, and many stocks and bonds
- Markets for trading specialized physical goods such as luxury items or houses are not liquid
- 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 $5.1 trillion, which is dominated by the U.S. dollar
- The opposite of a liquid market is called a “thin market” or an “illiquid market”
- Thin markets may have considerably large spreads between the highest available buyer and the lowest available seller
- A thin market by its nature damages liquidity. Individual investors may find it difficult or impossible to get a fair price in a thin market
- The most predictable thin market on Wall Street occurs every year in the last half of August when most traders abandon their desks and go to the beach ;)
- One significant factor related to liquidity is volatility
- Low liquidity, a thinly-traded market, can generate high volatility when supply or demand changes rapidly
- Conversely, sustained high volatility could drive some investors away from a particular market
Overall, 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.