Definition
The term liquid market refers to a marketplace characterized by robust trading, narrow bid and ask spreads, and low transaction costs. Liquid markets can also accept relatively large trades and not experience significant price swings.
Explanation
A liquid market is one where there are many buyers and sellers, transaction costs are low, prices are not volatile, and the difference between the price a seller will accept for an asset and a buyer is willing to pay is relatively small. Dealing in a liquid market is important for an investor because they can be assured they will be paid a fair price when buying or selling an asset.
Any of the world's large stock exchanges would be considered a liquid market. High volumes of securities are exchanged electronically, buy and sell orders are completed instantaneously, and transaction fees are a small percentage of the order value. In addition to stock exchanges such as the New York Stock Exchange and the NASDAQ, liquid markets would also include futures and commodities exchanges.
Related Terms
- The term support refers to a price point below which movement is impeded by the economic law of supply and demand. A support price point is identified through many observations and typically occurs over an extended period.
Moneyzine EditorNovember 6th, 2024 - The term resistance refers to a price point above which movement is impeded by the economic law of supply and demand. Resistance to movement above this price point typically occurs over an extended period of time.Moneyzine EditorNovember 6th, 2024
The term leg refers to one component of an options trading strategy that is constructed using two or more components. A trader may combine multiple derivative contracts, or legs, in order to profit from spreads or hedge a position.Moneyzine EditorSeptember 20th, 2023
The term breakout refers to the upward price movement of a security through what was previously identified as a price resistance point. When breakout occurs, the security will experience relatively heavy trading volume too.Moneyzine EditorNovember 6th, 2024- The term pin risk refers to a threat that an option held by the seller will expire at-the-money or near-the-money. Pin risk is a function of both the underlying asset's price as well as time.Moneyzine EditorSeptember 20th, 2023
