What is Liquidity?

Liquidity has two meanings in markets. First, how easily an asset can be bought or sold without moving its price: large stocks and major ETFs are very liquid; small stocks and some alternative assets are not.

Second, the amount of money flowing through the financial system — driven by central banks, credit and government spending. When this liquidity expands, asset prices tend to rise; when it contracts, markets struggle.

Liquidity can disappear exactly when it is needed most, in a panic — one reason prudent investors avoid assets they cannot easily sell.

By Dr. Harry Hamann