What does liquidity refer to in trading?

Liquidity in trading predominantly refers to the ease with which an asset can be converted into cash without significantly affecting its price. In practical terms, this means that a highly liquid asset can be sold quickly at a price that is close to its market value, ensuring that the seller does not incur a loss due to a price drop when selling their asset.

For example, stocks of large, publicly traded companies tend to be more liquid than those of small, privately held firms. This is because more buyers and sellers are involved in the trading of large-cap stocks, allowing for transactions to occur swiftly and without major price discrepancies.

The other options touch upon different aspects of trading but do not define liquidity. The total value of trades relates to market activity but doesn’t address the concept of liquidity directly. The speed of trade execution pertains to market efficiency rather than liquidity. Lastly, the amount of capital available for trading is a measure of an entity's financial capacity and does not specifically indicate how easily assets can be traded without price disruption.