Liquidity refers to the ability to convert assets into monetary terms quickly and without losses. Or, as soon as possible to sell, you have at your disposal a financial instrument and get it “live” money.
Assets and financial instruments are anything with market value. This can be bank deposits, stocks, bonds, real estate, business, goods, etc.
Liquid and illiquid assets
Depending on how quickly you can make an “exchange” for money at an affordable price, liquidity can be divided into 3 types:
- high liquidity;
- average liquidity;
- low liquidity.
Highly liquid assets include shares, bonds, deposits in banks.
Low-liquid assets include real estate. As a rule, the sale can take from several weeks to several months, if you want to get an adequate price for it, equal to the current market. It also includes a variety of products. Both finished and in the process of manufacturing. Selling a business is also a low-liquid instrument.
The concept of liquidity can be different within the same financial instrument. Again, the example of shares. There are “blue” chips, the demand for which is constant in the market, and the difference in price between buying and selling (spread) is hundredths of a percent. These are highly liquid stocks.
And there are so-called shares of the “second echelon.” Here, the demand for them is smaller, and the spread for buying and selling is higher. That is, they can be sold, but either at a slightly lower price or you have to wait some time until there is a buyer who can buy them at market value.
Low-liquid stocks include so-called “junk” stocks. Here at all can be all notorious. As a rule, to sell them, you need to make a significant discount, in the form of 20-30% or wait for the buyer a few weeks, or even months, who will buy them at a fair price.
Types of currency: major, minor and exotic
The major currencies are those that are more often the subject of transactions. These include the US dollar (USD), Euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Swiss franc (CHF). Sometimes the Australian dollar (AUD) is included in this group, but it is usually considered a minor currency. Minor currencies also include the Canadian dollar (CAD) and the New Zealand dollar (NZD).
Exotic is a currency that is not common in the currency exchange market. Exotic currencies often represent developing countries, such as parts of Asia, the Middle East, and Africa. It is much more difficult to operate with exotic currencies because the market of these currencies does not have the same level of activity as the main and secondary currencies.
The influence of liquidity on Forex trading
The concept of liquidity is important for investors whose goal is to make a profit from the invested funds. And in case of any negative circumstances in the financial market, they should be able to get rid of unnecessary assets at reasonable prices quickly. And transfer the money to another most promising (and more profitable) financial instrument.
Therefore, when investing money, the investor always tries to choose highly liquid instruments.