The liquidity is the capability of the market to buy and sell an investment tool, which does not result
in a sudden change in its price. If the market is liquid, it is characterized by low volatility, low spreads
and a big amount of offers and bids. Due to a considerable amount of purchasers and sellers, the
trades are effected easily and quickly, and the changes in the demand and supply do not have
a significant influence on the price of investment tools. Forex market, which deals with the currency
trading, is the most liquid in the world due to large trading volume, which exceeds $5 trillion a day.
Investing at the liquid market has numerous advantages.
First of all, the instruments can be quickly turned into cash. What is more, we are always familiar with the value of the assets, and their price
will not change abruptly, which gives the traders a sense of security and stability. The liquidity in a
particular equity at the forex market is ensured by a number of liquidity providers, who hope to earn
profit on spreads. These can be large investment banks, financial institutions, hedge funds or
investment companies. There is special group recognized as Tier-1 liquidity providers, which are the
largest financial and investment institutions. They offer the largest amounts of currency pairs for sale
and purchase, and render many transactional services for traders. The more LPs on the market, the
better for traders, because they can pay lower transactional costs and trade easier and faster.
There are also more and less liquid currency pairs.
Currently the most liquid pair is the Euro against US dollar. When trading in these currency pair, investors can make the most profitable transactions,
since the costs associated with effecting the trades are low.
Illiquid is a term describing an asset, which cannot be turned into cash fast due to a small number of
people, who want to buy it.
Therefore, it often happens that the price of an asset is lowered to find a purchaser faster.
Among illegal assets we can distinguish cars, antiques, collectibles, flats and houses.
The main disadvantage of investing in or purchasing illiquid assets is that it is associated with a higher
risk, because although they have some inherent value, their owners may have to considerably lower
Investors often wonder whether it is better to invest liquid or illiquid assets, but there is no
straightforward answer to this question. Both types of assets may have high returns on investment,
the question is whether an owner can wait for converting them into cash.