![]() You will have to sell your stamps first, and then use the cash to purchase the car. However, if you do not have cash but own a collection of valuable postage stamps that are probably worth more than $10,000, the car salesperson is unlikely to trade the car for your stamps. If you have that amount in cash, you can get the car immediately. ( Image: /benbernanke) Breaking down liquidityĮconomists use cash as the standard bearer of liquidity because it can be converted into other assets more rapidly than anything else. He received his doctorate in Economics from MIT. He studied at Harvard University, where he graduated with a Bachelors and Masters degree (Summa cum laude). He currently works at the Brookings Institution. Ben Shalom Bernanke (Born: 1953), an American economist, was Chairman of the Federal Reserve – the USA’s central bank – from 2006 to 2014. There are usually very narrow bid-offer spreads for hard currencies such as US Dollar/Yen, British Pound/US Dollar, euro/British pound, euro/US dollar, and euro/Yen. In the world of markets, Forex is the most liquid asset globally because of the high volume and frequency with which it is traded. Therefore a bid-offer spread in a market with high liquidity will generally translate into lower spreads offered on the platform. We derive our price from those in the underlying markets. When there are lots of orders to buy and sell in the underlying market, there is greater probability that the highest price any purchaser is willing to pay, and the minimum price any seller is prepared to accept will move closer together – the spread will tighten. If there are very few buyers and sellers – trading is infrequent – the market is illiquid. The same applies to buyers – they do not have to pay extra to find the asset they want. This is because the volume of purchasers and vendors in that market create a free flow of trade, as there is always somebody around willing to buy or sell.Ī seller can rapidly find a buyer in a liquid market without having to reduce the price of the asset in order to make it more appealing. When a market is being traded regularly, liquidity is said to be high – it is liquid. Some markets are highly liquid some are relatively illiquid.” Liquidity in markets “In the case of a market, a stock or a commodity, the extent to which there are sufficient buyers and sellers to ensure that a few buy or sell orders would not move prices very much. “Cash, cash equivalents and other assets (liquid assets) that can be easily converted into cash (liquidated).” When it is frozen into ice, you cannot drink it instantly – you have to wait until it melts.Īccording to the Financial Times’ glossary of terms, to define liquidity refers to: When water is in liquid form you can drink it immediately – it has high liquidity. If there is a major change in price when you try to buy or sell an instrument – if it is even possible to transact – it is illiquid.Īn analogy could be the difference between water and ice – imagine that liquid drinking the water represents your ability to instantly buy things. For example, a sovereign bond or a share in a blue-chip company (large, listed firm) is easy to price and can be traded without a significant impact on that price. Liquidity is also a measure of how easily transactions can be performed in a particular instrument or security. Some markets are more liquid than others. In the world of markets, liquidity refers to a commodity or stock and the extent to which there are enough buyers and vendors to ensure that a few buy-sell orders will not affect prices very much. The most liquid asset of all is cash, because it can be ‘sold’ for goods and services straightaway without any loss of value. In accounting, it is the ability of current assets to pay for current liabilities. ![]() It is a measure of the extent to which a person, organization or entity has cash to meet short-term and immediate obligations. Liquidity refers to how easily and rapidly an asset can be spent, if so desired. ![]()
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