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Liquidity, and its importance in the markets 101 :
1#
Liquidity, in simple terms, is the ability to convert an asset with ease. If you didn't have liquidity in a market or an asset that you are participating in, you may find it hard to sell if required due to a lack of buyers
1#
Liquidity, in simple terms, is the ability to convert an asset with ease. If you didn't have liquidity in a market or an asset that you are participating in, you may find it hard to sell if required due to a lack of buyers
2#
So we will start with poor liquidity. To have poor liquidity, means that an asset cannot be brought or sold easily. Due to the evident thin order books, if a large order is sold then the price will sell off heavily.
This in turn, would not look attractive to investors
So we will start with poor liquidity. To have poor liquidity, means that an asset cannot be brought or sold easily. Due to the evident thin order books, if a large order is sold then the price will sell off heavily.
This in turn, would not look attractive to investors
3#
So now we come to good liquidity. To have good liquidity, means that an asset can be brought or sold easily. If a buyer was to purchase a large order of the asset, this would also have a very minimal effect on the price .
This in turn would look attractive to an investor
So now we come to good liquidity. To have good liquidity, means that an asset can be brought or sold easily. If a buyer was to purchase a large order of the asset, this would also have a very minimal effect on the price .
This in turn would look attractive to an investor
Liquidity can be demonstrated via a bid-ask spread. This is the difference between the highest asking price and the lowest asking price of an asset.
When an asset has a low bid-ask spread, this demonstrates liquidity is present due to an increase in participants
When an asset has a low bid-ask spread, this demonstrates liquidity is present due to an increase in participants
How can Liquidity pose a problem to you as a trader ?
Lets say you entered an illiquid Alt one day and built up a large position, then one day you decide you want to sell your position
You may not be able to sell at your desired price and encounter what is known as slippage
Lets say you entered an illiquid Alt one day and built up a large position, then one day you decide you want to sell your position
You may not be able to sell at your desired price and encounter what is known as slippage
Slippage is where you look to close your position at a specific price, but due to the thin order books and low liquidity, your position fills at an undesired price
So it is always very important to check the liquidity against your desired position size to ensure ease of movement
So it is always very important to check the liquidity against your desired position size to ensure ease of movement
