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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Liquidity
Liquidity is defined as the ability to trade large size quickly at a low cost. It is one of the most important characteristics of a market. A liquid market allows traders to implement their strategies cheaply, normally with a limited bid/ask spread. A liquid market is characterized by high volume. It is generally less volatile than an illiquid market.
Usually, you can refer to three dimensions of liquidity - time, size and cost:
• “Immediacy” refers to how quickly you can execute a trade of a given size at a given cost.
• Width refers to the cost of executing a trade of a given size, including commissions.
• Depth refers to the size of a trade that can be executed at a given cost. Width and depth are very strictly related.
A liquid market is a market where you can trade large size quickly at low cost. Liquidity refers to how quickly you can convert your assets into cash. [1] Liquidation is the conversion of assets into cash by an Investor getting rid of a position in a particular type of security. [2]
For example, a portfolio manager might decide to liquidate a position in a stock by selling all the shares of that stock held in the portfolio. [3]
1610s, from liquidus. [1] Liquid Financial sense of "capable of being converted to cash" is first recorded 1818. [2]
References
- ↑ Stock Investing for Dummies By Paul Mladjenovic pg22 ISBN-10: 0470401141
- ↑ Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott Accounting Professor ISBN-10: 0618176519 pg 212
- ↑ Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. ISBN-10: 0618176519 pg212
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