Finance Definitions: Market Liquidity

Market Liquidity refers to an investment’s capability to be transferred instantly to cash without diminishing its current value. Cash or money is the supreme example of a liquid asset. Determining a liquid asset is quite easy, as long as it can be exchange quickly with little or no change in value. One other factor is the presence of buyers and sellers at any given time. If the there are a large amount of buyers and trader, then an asset is considered very liquid. When this happens, the effects of the transactions will most likely have definite impact on the overall market prices.

On the other hand, an asset that cannot be exchange quickly and may have difficulty in marking its value is called an illiquid asset. A product’s liquidity can be calculated by how much it is traded by buyers and sellers, and the result of this is volume. Investments such as stocks and futures are liquid compared to other assets such as property and real estate. Speculators and investors usually cause market liquidity. They profit from the stock market by anticipating the current prices of each asset. The effect of their trading and transactions provide a continuous flow of money and capital to promote liquidity.

As we move along to the futures market, there is no definite guarantee that a market’s liquidity will occur to make up for the commodity contract at any time. Future trading is known as a very liquid trading environment. The most common factors to check for liquidity are the volume of trading and open interest.

Liquidity in banking has a broader term. In this sector, it is known as the facility to reach financial objectives without suffering any undesirable losses. Bankers who manage liquidity keep an eye on trends and cash flows to make sure that proper amount of liquidity is sustained. It is important to maintain stability on short-term assets and liabilities. Primary funding in banks is mostly sourced thru deposit accounts, while primary assets are from the loan portfolio. The main source of liquidity comes from the investment portfolio. Investment assets and securities have the ability to be liquidated to complement bank withdrawals and growing loans. By selling loans, borrowing from other financial institutions and raising capital, these factors all contribute to generate liquidity. In times of financial difficulties, the depositors can ask for their finances if the bank is incapable of generating cash without getting more money losses.

Financial institutions such as banks can usually maintain a certain level of liquidity required, and this is because the government insures bank deposits. If liquidity issues do arise, rates can be raised to ensure that it goes back to normal. Take note that banks attract more money thus providing more liquidity that influences all the movement of money in the world.

Market Liquidity is such an important factor in finance. It plays a part in transferring various stocks to their respective values, and vice versa. So, be safe all the time. Invest in investment assets with fast liquidity.