In terms of trading, what is a common indicator of a liquid asset?

In terms of trading, what is a common indicator of a liquid asset?

• A. High volatility
• B. Narrow bid-ask spread
• C. Low trading volume
• D. High transaction costs

Answer: (B)

A narrow bid-ask spread is an important indicator of a liquid asset because it reflects the difference between the price at which an asset can be bought (ask price) and the price at which it can be sold (bid price). In a liquid market, where there are many participants and a high volume of transactions, this spread tends to be smaller. A narrower spread indicates that buyers and sellers can transact closer to the market price, which reduces transaction costs and results in more efficient pricing. In contrast, high volatility often signifies price fluctuations rather than liquidity. Low trading volume is typically associated with illiquid assets since lower activity can widen the spread and increase the time it takes to execute trades. High transaction costs are more likely to arise in less liquid markets, where the costs of executing trades can increase due to wider spreads and fewer available counterparties.

A narrow bid-ask spread is an important indicator of a liquid asset because it reflects the difference between the price at which an asset can be bought (ask price) and the price at which it can be sold (bid price). In a liquid market, where there are many participants and a high volume of transactions, this spread tends to be smaller. A narrower spread indicates that buyers and sellers can transact closer to the market price, which reduces transaction costs and results in more efficient pricing.

In contrast, high volatility often signifies price fluctuations rather than liquidity. Low trading volume is typically associated with illiquid assets since lower activity can widen the spread and increase the time it takes to execute trades. High transaction costs are more likely to arise in less liquid markets, where the costs of executing trades can increase due to wider spreads and fewer available counterparties.