The term liquidity
is used to define the ability to sell or buy an asset without causing big impacts in the market price. It is also related to the idea of how easy it is to convert an asset to fiat currency
. Properties or assets that are difficult to convert to cash are not liquid, while the ones that can be exchanged right away are deemed as a liquid asset.
Markets are considered liquid when a trader or investor can promptly sell or buy a particular asset, meaning that there is always a counterpart willing to trade. In contrast, a market that is not considered liquid would require the trader to wait much longer until his order is finally executed.
This means that traders are often seeking for a liquid market, so they are able to buy and sell financial instruments in an efficient way - without having to wait for too long or to accept unfair prices. Therefore, liquid markets are the ones that present a high volume of trading activity as well as a reasonable spread (not too big) between the bid and ask orders. Binance
, for instance, has a liquid Bitcoin
market because there are always traders willing to buy or sell BTC, and the bid-ask spread
is usually very small.
Another context where liquidity may be used is in accounting, where the term accounting liquidity refers to the ability of borrowers to pay their debts on time. Therefore, a company is considered liquid when it is able to pay their loans and debts without problems.