Economics Financial Markets Questions
Market liquidity refers to the ease with which an asset or security can be bought or sold in the market without causing significant price changes. It is a measure of the market's ability to handle large volumes of transactions without impacting the asset's price stability. High market liquidity means there are many buyers and sellers in the market, resulting in tight bid-ask spreads and low transaction costs. Conversely, low market liquidity indicates fewer participants, wider bid-ask spreads, and higher transaction costs. Market liquidity is crucial for efficient price discovery, as it allows investors to enter or exit positions quickly and at fair prices.