market liquidity

(noun)

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.

Related Terms

  • transparency

Examples of market liquidity in the following topics:

  • Defining Spread

    • The spread is the difference between the prices for immediate purchase and sale of a stock, which is one measure of market liquidity.
    • The size of the bid-offer spread in a security is one measure of the liquidity of the market and size of the transaction cost.
    • Liquidity demanders place market orders and liquidity suppliers place limit orders.
    • A limit order can only be filled if the stock's market price reaches the limit price.
    • In some markets such as NASDAQ, dealers supply liquidity.
  • Chapter Questions

    • If one bond market has a high risk while the other is low risk, then how does risk impact the bond markets?
    • If one bond market were highly liquid while the other market has low liquidity,subsequently, how would liquidity impact the bond markets?
    • If one market has high information costs while the other does not, then how would information cost affect the bond markets?
    • If a government taxes one bond market but not another, subsequently, how would taxes affect the bond markets?
  • Liquidity and Bond Prices

    • Liquidity causes bond prices and interest rates to differ.
    • We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
    • Thus, both bond markets have the identical equilibrium bond price, P*, and hence, the exact liquidity.
    • Then the secondary markets expand for government bonds boosting the liquidity for these securities.
    • On the other hand, the corporate bond prices decrease, raising the market interest rate for corporate bond.
  • Reasons for Maintaining Cash on Hand

    • In business, economics, or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.
    • In bookkeeping and accounting, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near immediately (as in the case of money market accounts).
    • Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained.
    • Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand.
    • Most banks are subject to legally mandated requirements intended to help banks avoid a liquidity crisis.
  • Market Maker

    • Market makers provide liquidity to securities markets by submitting both bids and asks on a security.
    • This is called liquidity.
    • But what happens if there is no liquidity?
    • A lack of liquidity is really bad for investors.
    • This helps to provide liquidity to the market, making the market more efficient.
  • Secondary Market Organizations

    • The secondary market is the financial market in which previously issued instruments such as stock, bonds, options, and futures are bought and sold.
    • The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.
    • The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies.
    • Exchanges such as the New York Stock Exchange, Nasdaq, and the American Stock Exchange provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges.
    • In the U.S., over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB).
  • Drivers of Market Interest Rates

    • Market interest rates are mostly driven by inflationary expectations, alternative investments, risk of investment, and liquidity preference.
    • A market interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
    • In a free market there will be a positive interest rate.
    • Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realize.
    • There is a market for investments which ultimately includes the money market, bond market, stock market, and currency market as well as retail financial institutions like banks.
  • The Imperative of Liquidity

    • To accurately frame the discussion of cash flows, an understanding of liquidity is integral.
    • When considering cash flow, it is important to understand liquidity risk.
    • The difficulty in taking a certain asset to market, and recovering capital without incurring a loss of value, is called liquidity risk.
    • Inflation generally devalues any cash asset, and investing capital into money markets can generate interest.
    • Consider the concept of liquidity as it pertains to an organization's available cash flow and overall ability to capture opportunities in the market
  • Taxes and Bond Prices

    • Nevertheless, you pay no taxes, compensating you for the greater risk and lower liquidity.
    • Demand and supply analysis shows the impact of taxes on the bond markets in Figure 4.
    • Government taxes both the municipal and non-municipal bonds while the default risk, liquidity, and information costs are equivalent for both markets.
    • Consequently, bond market prices have the same market price, P* and pay identical interest rates.
    • Thus, investors are attracted to municipal bonds, boosting their demand, increasing the market price and decreasing the market interest rate.
  • Importance of Working Capital

    • Working capital (WC) is a measurement of a company's operating liquidity.
    • WC is a signal of a company's operating liquidity .
    • If they are a public company, their stock price may fall if the market doesn't believe they have adequate WC.
    • For small businesses and start-ups, unable to access financial markets for borrowing, WC has more dire implications.
    • WC is only one measure of a company's operating liquidity.
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