In trading, what does liquidity mean and how does it work
In: Economics
You can think of it as the ‘transferability’ of a financial instrument (either cash, or an investment). High liquidity means it’s easier to use and transfer an item; low liquidity means you’re pretty much stuck with it.
Cash is a very liquid thing. You don’t need to find a buyer before you can use it, or involve a middle man. You can just go out and spend it. If all of your wealth is tied up in housing, for example, that’s not very liquid. If you can’t find a buyer, you’re technically *worth* a lot, but if a hot new investment opportunity opens up, you’re probably not going to be able to get enough cash together quickly to invest in it.
Similarly, if there’s an investment that is constantly changing hands — Bank of America stock, as /u/Bhimpele said — then it’s considered liquid; it moves around the marketplace a lot. If you have a stock that very few people are interested in buying or selling (and it can be either, not both), it’s not liquid. It’s either very hard to take possession of it, or if you’ve got it it’s a pain in the ass to get rid of — therefore it’s not easily transferable.
It’s liquid because it flows easily from one place to another.
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