Market liquidity refers to the ease with which an asset can be bought or sold in the market without causing a significant change in its price. In simpler terms, it measures how quickly investors can convert their holdings into cash. A market with high liquidity allows smoother transactions and tighter bid-ask spreads, ensuring fair price discovery and efficient trade execution.

In the stock market, liquidity plays a critical role in determining investor confidence and overall market stability. Highly liquid assets, such as shares of large-cap companies or government securities, attract more participants due to their low transaction costs and minimal price volatility. On the other hand, illiquid markets ó such as those involving small-cap stocks or niche bonds ó often experience wider bid-ask spreads and higher price fluctuations, making it harder to exit positions swiftly.

Factors affecting market liquidity include trading volume, number of market participants, regulatory framework, and economic conditions. During times of uncertainty or financial stress, liquidity tends to dry up as investors become risk-averse. Conversely, in stable or bullish market phases, trading activity and liquidity generally rise.

For investors and traders, monitoring liquidity is essential for effective portfolio management. It helps in assessing market depth, determining entry and exit points, and managing risk exposure. Institutional investors, in particular, rely on liquid markets to execute large trades without distorting prices.

Overall, market liquidity serves as a key indicator of market efficiency and investor sentiment. A liquid market enhances transparency, promotes fair valuation of assets, and supports long-term economic growth by enabling the smooth flow of capital across sectors.