Liquidity refers to the ease with which an asset or security can be bought or sold in the market without causing significant price fluctuations. It represents the ability to convert an asset into cash quickly and at a fair price. High liquidity means there is a large volume of buyers and sellers, resulting in narrow bid-ask spreads and minimal impact on the asset's price. Low liquidity, on the other hand, implies fewer participants and larger bid-ask spreads, making it more challenging to buy or sell the asset without affecting its price. Liquidity is vital for efficient markets, as it enhances price stability, facilitates trading, and provides investors with flexibility and confidence.
