LIQUIDITY AND VOLUME
Liquidity is a measure of how easily an asset can be bought or sold. A liquid asset is one that we would have no problem selling at its trading price. A related concept is a liquid market, which is a competitive market flooded with asks and bids (leading to a tighter bid-ask spread).
A problem we might encounter with an illiquid market is that we’re unable to sell our assets at a “fair” price. This tells us there are no buyers willing to make the trade, leaving us with two options: lower the ask or wait for liquidity to increase.
Trading volume is an indicator that can help us determine liquidity. It can be measured in a few ways and serves to show how much value has been traded within a given time period. Typically, charts display the daily trading volume (denominated in native units or in dollars).
Being familiar with liquidity can be helpful in the context of fundamental analysis. Ultimately, it acts as an indicator of the market’s interest in a prospective investment.
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