The degree of an asset’s ability to be converted to cash at its fair market price.

For an asset, its liquidity is its ability to be bought or sold without any discount or premium. Liquidity thus reflects the amount and frequency the asset and traded. The more something is bought and sold, an individual’s ability to charge premium or look for discounts lowers. However the less liquid something is, the harder it will be for it to be bought or sold.

A market that is liquid means it has many trades and is composed of many traders and transactions and thus makes it theoretically impossible for single entities to “corner” the market, although central banks can have some influence, but the market ultimately should decide the fair price.

The Forex market is extremely liquid because hundreds of banks and millions of individuals trade currencies everyday. In fact, by April 2010, more than $4.0 trillion is exchanged daily and this number is increasing as interest by retail traders are expanding.* Consequently, traders can trade instantly with a click or two.

On the other end of the spectrum, real estate development is an extremely illiquid market because it requires a lot of capital and investments are made into physical form such as buildings.

As a result you will find a bigger range of price offered for illiquid assets while a highly liquid asset will have a very specific price.

*According to the BIS
www.bis.org