Markets Explained

Why Liquidity is so Important?

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Why Liquidity is so Important?

One of the biggest advantages that America has in the global marketplace is the strength of its capital markets. One key component of our country’s strong capital markets is liquidity. But what does that mean, exactly?

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What is market liquidity?

Liquidity refers to the ease and speed at which someone may buy or sell a security. Put another way, the standard measure of liquidity is how quickly and with how little impact on price an investor can exchange something like a stock for cash.

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Why does liquidity matter to investors?

Liquidity is incredibly important. After all, if you felt that it would be difficult to sell a stock for cash quickly, would you be more or less likely to invest? Capital markets depend heavily on investors’ confidence, and highly liquid markets are critical to maintaining confidence.

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What does a “liquidity premium” mean?

America’s deep and liquid capital markets give U.S. entrepreneurs, corporations, municipalities and investors greater access to less expensive funding and investment because investors are willing to pay more for securities that offer better liquidity. This “liquidity premium” helps entities grow and contributes to overall wealth creation.

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How large are the American capital markets?

The United States is the largest economy in the world. Capital markets in the U.S. are highly liquid — it is easy to buy and sell stocks and other securities, which in turn means that American markets attract a lot of investment from many types of investors and from all over the globe.

According to the Standard and Poor’s Global Stock Markets 2013 Factbook, the U.S. represents 35 percent of total global stock market capitalization – the value of all stocks worldwide – and over 40 percent of all equity trading worldwide.