Liquidity

[Tradewinds 12]

This thread is dedicated to the topic of Liquidity:

 

• How it is created
  

• Importance to the market
  

• Importance to the trader
  

• Implications of it
  

• Benefits and dangers of liquidity
  

• What you need to know about it
  

• How it can be determined
  

[Tradewinds 12]

Liquidity: The importance to the market

 

No one would knowingly buy an investment that they knew they could never resell. It would be pointless. This is the very basis of liquidity.

 

Liquidity is a very basic goal. It is a major goal for the exchanges that create and control the markets.

 

Without liquidity, investors may be reluctant to buy an investment. With no buyers, there is no market.

[Tradewinds 12]

Liquidity: How it is created

 

Liquidity is created by Many Buyers : Many Sellers This is a basic economic principle. There is also the issue of how often something is being bought and sold. The average person with a retirement account does very little buying and selling of investment products. Traders may be trading on a daily basis.

 

The trader is willing to take a short term risk to buy and sell. The market exchanges benefit from a lot of buyers and sellers because it increases liquidity.

 

Traders need an incentive in order to execute a lot of short term trades. No one would be attracted to trading without some kind of incentive. So the market provides an incentive, which is profit. Traders want to make a profit, so they trade. The more traders that trade, the greater the liquidity.

 

Liquidity is created buy many buyers and many sellers, who are attracted to buy and sell for profit. Traders add even more liquidity to the market. The entities who own the securities exchanges benefit from the liquidity, because it decreases the entry and exit barriers. If there is no real barrier to enter and exit investment transactions, people freely engage in the market.

 

Traders must be offered potential income as an incentive for them to buy and sell investment securities in the short term.

[pbylina 10]

So is it possible in an illiquid/low volume market, that your stop loss might not get triggered? (no one wants to buy it from you)