Liquidity in trading refers to the ease and speed with which an asset or security can be converted into cash without affecting its market price. It is a measure of how quickly an investment can be bought or sold and converted into cash. The most liquid asset is cash, which can be quickly and easily converted into other assets. Tangible assets, such as real estate, fine art, and collectibles, are relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum.

Market liquidity refers to how quickly a stock can be turned into cash. High market liquidity means there is a high supply and demand for an asset, making it easy for buyers to find sellers and vice versa. When the spread between the bid and ask prices tightens, the market is more liquid; when it grows, the market becomes more illiquid. Trading volume is another important indicator of stock liquidity, with stocks that trade heavily having greater market liquidity.

Liquidity is an important metric for investors to pay attention to as they construct their portfolios. Good liquidity for a stock refers to an investors ability to sell the stock in exchange for cash. If a stock is liquid, then it should be relatively easy to sell, but if it is illiquid, it may take significant time to sell, or it can only be sold at a discounted value. Liquidity risk is the risk that an individual wont be able to find a buyer or seller for assets they wish to trade during a given period of time, which can lead to adverse effects on the price.