Question

Write 2-3 paragraphs Defining and explaining liquidity. What are 2 key characteristics of liquidity? Show some examples in real life situations.

Answer 1

Liquidity means the ability of an asset to be sold at the the current market price and realisation of the value quickly.investors are always preferring assets with the higher liquidity because they will be providing the investors with quick realisations and quick exits.

Two characteristics of the liquidity are as follows-

A. Availability of willing buyers and sellers at the any point of time that will help the the market participants to buy and sell securities at any moment because that would be helpful in realisation of the cash quickly.there would be a presence of large number of buyers and sellers who wants to transact and gain.

B. Another characteristic of liquidity would be instant realisation of the value of the Asset because when the the holder of the assets will offload the security, it will mean he can realise the value quickly.

if it has to be exampled from the real life, it can be exampled in the scenario of the investment, where as investors are always willing to invest into the stock market because it provides with a high liquidity and high volume and better transparency.