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How market liquidity affects the trade

How market liquidity affects the trade

The liquidity of the market represents the stability of the market during the sale or purchase of the asset. A market that has enough liquidity will not experience a large change in the price of an asset that went through purchase/sale. The asset also has liquidity. If an asset is liquid, then it can go through the sale/purchase without any substantial price decrease.

The most liquid asset on the market is the cash. The money can be exchanged for goods in an instant, and it will never lose value in that kind of the trade. Cash only loses its value on the Forex market, but even in that case, it retains its liquidity.

Investors (traders) exchange assets with low liquidity for assets who liquidity is high and constant. This type of trade is called liquidation. Some dealers also sell those assets for cash. This sounds strange (why would anyone buy an asset that has no liquidity), but the liquidity of an assets isn’t same on all markets. Some traders earn their share by trading assets with low liquidity. They find a market for which the asset has better liquidity and then they sell it there. The difference between the strength of the liquidity determines the profit of that trade.

Liquidity has the enormous impact on the markets that depend on the asset price. The stock market depends on many things, and the liquidity is one of them. When a trader buys a stock he spends his money and the expected return depends on the price of the same asset. If the asset has high liquidity, then there isn’t a high risk of a decrease in the price. Over the time the price of the property may increase, and the trader can sell his asset and earn some money on that trade.

Option markets (Binary options market especially) are dependent on the liquidity of the market as well as the liquidity of the asset. When a trader buys an option, he waits for the price of the property to change. The trader has two choices, call or put which represent two points, one above and one below the original price. Assets with good liquidity have the very substantial price which doesn’t fluctuate. On the other hand, an asset with low liquidity may vary in its price both up and down. The overall liquidity of the market has the big impact on the binary options as well. If you want more info about binary options, then visit Quantum Code, where you can find all relevant data about this form of trading.

The banking system has a different approach to liquidity. Bankers have to keep an adequate level of liquidity at all times to prevent unacceptable losses. Those losses occur when the system fails to meet obligations. The majority of the banks have a firm grasp of the liquidity. They can easily maintain the necessary liquidity level through increase and decrease of deposit rates and other deposit products. But the bank has to spend money to maintain liquidity. If a bank pays the bulk of the liquidity, then it isn’t as stable as it seems.

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