How is market liquidity primarily assessed?

How is market liquidity primarily assessed?

• A. By analyzing the number of market participants
• B. By evaluating trading volume and bid-ask spread
• C. By monitoring corporate earnings announcements
• D. By checking news updates on economic indicators

Answer: (B)

Market liquidity is primarily assessed by evaluating trading volume and the bid-ask spread. Trading volume indicates how many shares or contracts are being bought and sold over a specific period, providing insight into the level of trading activity. High trading volume typically suggests better liquidity because it indicates that there are many buyers and sellers in the market, making it easier to enter and exit positions without significantly affecting asset prices. The bid-ask spread, on the other hand, is the difference between the highest price that a buyer is willing to pay (the bid) and the lowest price that a seller is willing to accept (the ask). A narrower bid-ask spread is a sign of high liquidity, as it suggests that there is less disparity between buyers and sellers, facilitating smoother transactions. Together, trading volume and bid-ask spread provide a comprehensive picture of market liquidity, helping traders understand how easily they can execute trades at desired prices without substantial delay or price impact.

Market liquidity is primarily assessed by evaluating trading volume and the bid-ask spread. Trading volume indicates how many shares or contracts are being bought and sold over a specific period, providing insight into the level of trading activity. High trading volume typically suggests better liquidity because it indicates that there are many buyers and sellers in the market, making it easier to enter and exit positions without significantly affecting asset prices.

The bid-ask spread, on the other hand, is the difference between the highest price that a buyer is willing to pay (the bid) and the lowest price that a seller is willing to accept (the ask). A narrower bid-ask spread is a sign of high liquidity, as it suggests that there is less disparity between buyers and sellers, facilitating smoother transactions.

Together, trading volume and bid-ask spread provide a comprehensive picture of market liquidity, helping traders understand how easily they can execute trades at desired prices without substantial delay or price impact.