Liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. High liquidity markets feature tight bid-ask spreads, large trading volumes, and minimal price impact from individual transactions. Liquidity is essential for efficient price discovery, risk management, and market functioning across all asset classes.

Liquidity conditions vary by market, time of day, and market conditions, with some periods experiencing reduced liquidity that increases trading costs and price volatility. Understanding liquidity patterns helps traders optimize execution timing and strategy selection. Central banks and market makers play crucial roles in maintaining market liquidity through their trading activities and policy interventions.

Real-world example: EUR/USD forex pair maintains high liquidity with 1-2 pip spreads and $6 trillion daily volume, allowing large institutional trades with minimal price impact, while small-cap stocks may have wide spreads and significant price impact from modest trading activity.