What is meant by "liquidity" in trading?

Liquidity in trading refers to the ease with which an asset can be bought or sold in the market without causing a significant impact on its price. When a market is said to be liquid, it means there are enough transactions occurring for traders to enter or exit positions efficiently and with minimal price fluctuations. Higher liquidity typically results in narrower bid-ask spreads, meaning traders can execute trades at prices closer to the market value of the asset.

The total volume of commodities traded is not a complete representation of liquidity, as it does not account for how easy or difficult it is to buy or sell without affecting the price. Profitability is focused on the returns generated from an investment, rather than the transaction dynamics that define liquidity. The amount of margin required for trading relates to the capital necessary to open a position and is not indicative of how well an asset can be traded in the market. Therefore, the definition that accurately captures the essence of liquidity is the ease of buying or selling an asset without significantly affecting its price.