Liquidity is a critical concept in financial markets, representing the ability to convert an asset into cash or another asset without causing a significant impact on its market price. High liquidity means that there are many buyers and sellers actively trading the asset, allowing for quick transactions at stable prices. Conversely, low liquidity indicates fewer market participants, which can lead to wider spreads, price fluctuations, and difficulties in executing trades promptly.

Liquidity is essential for both individual investors and the broader market. For investors, liquid assets like stocks of large companies, government bonds, or major currencies can be sold or bought quickly, allowing for flexibility in managing portfolios and reacting to market changes. Illiquid assets, such as real estate, certain small-cap stocks, or niche commodities, may take longer to sell and could require price discounts to attract buyers.

The liquidity of an asset can be influenced by various factors, including market conditions, the asset’s nature, and the number of participants in the market. Market liquidity can also be affected by macroeconomic factors, such as interest rates, regulatory changes, and economic stability.