It’s the ability to swiftly turn an asset into cash without significantly impairing its value. High liquidity indicates a healthy market with plenty of buyers and sellers, which promotes smooth transactions and stable prices. It ensures that investors can profitably enter into or exit positions, reducing transaction costs and the risks of abrupt price swings.
Several variables, including trading volume, market depth and the presence of willing participants, affect market liquidity. It can be difficult for investors to execute trades at desired prices when insufficient liquidity can cause volatile price swings.