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Liquidity |
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LiquidityThe capicity to turn assets into cash, or the amount of assets in a portfolio that have that capacity. Cash itself (i.e., money) is the most liquid asset.LiquidityIn financial markets, 'liquidity' refers to the ease of dealing in a security - whether shares, options, warrants or some other instrument. Another way of looking at it is - how easily can the shares can be bought and sold without significantly moving the price?In general, large companies, with hundreds of millions of shares in issue, and high numbers of shares changing hands every day, have good liquidity. If you are selling or buying a parcel of 5,000 shares in AstraZeneca, for instance, your broker won't have any trouble dealing the order.In contrast, small companies with few shares in issue and thin trading volumes, can have very poor liquidity. If you try to sell 5,000 shares in a small company trading on AIM or OFEX, you may have difficulty actually getting the trade done.Associated with liquidity is the concept of the 'spread' which is the difference between the bid and offer price quoted by market makers. The bid price is what the market maker will pay for your shares if you want to sell them. The offer is the price at which you can buy them from him. Large, liquid, stocks have narrow spreads (a good thing). Small, illiquid, stocks have wide spreads (a bad thing).Similar MatchesLiquidity crisisLiquidity crisisA financial crisis that occurs due to lack of liquidity. In international finance, it usually means that a government of central bank runs short of international reserves needed to peg its exchange rate and/or to service its foreign loans. Liquidity premiumLiquidity premiumForward rate minus expected future short-term interest rate. Liquidity trapLiquidity trapA situation in which expansionary monetary policy fails to stimulate the economy. As used by Keynes (1936), this meant interest rates so low that expectations of their increase made people unwilling to hold bonds. Today it usually means a nominal interest rate so near zero that lowering it further is impossible or ineffective. Accounting liquidityAccounting liquidityThe ease and quickness with which assets can be converted to cash. Liquidity preference hypothesisLiquidity preference hypothesisThe argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates. Further Suggestionsliquidity ratioLiquidity diversification Liquidity Fund |
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