Robert Kiyosaki, the celebrity author of the monumental book Rich Dad, Poor Dad said, “Knowledge is power. And with money comes great power that requires the right knowledge to keep it and make it multiply.”
That’s why you must keep on top of all the latest financial trends and terms.
One of these is market liquidity. It seems like it should be pretty straightforward, but there’s a lot more to this nuanced financial term than you might imagine. Keep reading to learn more about the causes of market liquidity and how you can use it to trade in the stock market.
What Is Market Liquidity?
When an asset can be purchased and sold easily and quickly, and at stable prices, that market is considered to be liquid. Market liquidity is considered to be high. And vice versa – if assets are hard to buy and sell, and the prices are volatile, the market is illiquid.
Causes of Market Liquidity
One major cause of market liquidity is when there is a high supply and demand for an asset. When that is the case, trading activity is high, and this results in a liquid market.
For example, if you looked at the cryptocurrency market in the past 2-3 years, it was a highly liquid market, with lots of buyers and sellers. Even though it’s slowing down a bit now, it’s still quite liquid.
Why Is Market Liquidity Important?
If you are in the stock market or the real estate market, you will want to pay close attention to market liquidity. Liquidity is what dictates how easy it will be for you to open or close positions in the stock market or to buy and sell homes as a real estate investor.
Unless you are a buy-and-hold investor, you will surely want to get out of some or all positions at some point. That’s why market liquidity matters so much.
If a market is illiquid, then people are less likely to open new positions in the market, since they worry they won’t be able to get out of their open positions at good prices. Trading activity goes down in illiquid markets.
One scenario that affects market liquidity is quantitative easing and tightening.
Whenever there’s a lot of inflation, the Federal Reserve’s monetary policy will be to go into quantitative tightening mode to reduce the impact of inflation on the market, which creates an illiquid market.
Knowledge Is Power in the Stock Market
This is a just brief overview of market liquidity, but it should get you started. As an investor in the modern market, you can’t just put your money into blue chip stocks and wait for the money to roll in.
There are lots of opportunities out there if you have the financial knowledge to take advantage of them. Keep reading and learning through all related and informative topics, so you can stay on top of the latest financial market trends.