Liquidity refers to the degree to which an asset or security can be quickly bought or sold in the market without affecting its price. In other words, liquidity is the ease with which an investor can enter or exit a position without significantly impacting the market price.
For example, a highly liquid stock would have a large number of buyers and sellers actively trading the stock, which would make it easier for an investor to buy or sell shares at the current market price. On the other hand, a low-liquidity stock may have fewer buyers and sellers, which can lead to wider bid-ask spreads and make it more difficult to execute trades.
Liquidity is an important consideration for traders and investors, as it can impact the ability to enter or exit a position at a desired price. Highly liquid markets generally have lower transaction costs and lower bid-ask spreads, while illiquid markets may have higher transaction costs and wider bid-ask spreads. Traders should also be aware that liquidity can vary depending on market conditions, such as during periods of high volatility or market stress.