What is market liquidity?

    The term liquidity of a market or financial instrument describes how much and often it is traded. The markets that provide liquidity are also called liquidity pools.

    If a financial instrument is to be bought or sold, then there needs to be a willing buyer. High liquidity means that a high number of parties are willing to take the other side of the trade. This can be provided by either individuals trading as the counter-parties, or a large holder of a financial instrument, which is willing to take the other side of the trade.

    Liquidity in a market is good for every participant, as it reduces risk and provides more opportunity to buy or sell at the desired price. The desire for more liquidity is one of the primary reasons why online trading is so healthy for the economy. The cost of trading is being brought down, allowing traders to trade on much lower capital without being eaten up by the spreads.

    When choosing which asset class you want to trade, liquidity can play a relevant role.