Liquidity refers to how easily you can buy or sell something without causing big price changes. When there's a balance between buyers and sellers, transactions happen smoothly. If there are more buyers, supply might run short, and if there are more sellers, demand might be low.
Liquidity in finance describes the availability of liquid assets to a market or company, readily available for use as needed. Understanding liquidity is vital for assessing market conditions and optimizing investment strategies.
Let's think that a stock is hitting the lower circuit continuously, means there are sellers present in the stock but no buyers available. Again, if a stock hits the Upper Circuit consecutively, means there are buyers present in the stock but no sellers available. In this scenario Liquidity is low in both stocks.
In case of Intraday Trading, trade should always be taken in stocks with high liquidity i.e. where a good number of buyers and sellers are present.
Here are two main measures of liquidity: Market Liquidity and Accounting Liquidity.
Market liquidity refers to how easily assets can be bought and sold in a ma hnrket, like a stock exchange or real estate market, at predictable prices. In highly liquid markets, such as the stock market, bid and ask prices are close due to a high volume of transactions.
Accounting liquidity measures how easily a person or a company can pay their bills using readily available cash or assets.
The most liquid financial markets include the FX market, large-cap equities, and the commodities market.