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Liquidity Trap

Definition of Liquidity Trap

A Liquidity Trap is an economic event where the general public stashes cash in their bank savings account instead of investing in bonds because of the assumption that a rise in interest rates is imminent, even though interest rates are low.

Related Terms

Algorithmic Trading

Algorithmic trading or algo trading means buying and selling securities using computer algorithms that follow a set of predefined rules to execute trades.
In algo trading, predefined rules can be set to act on triggers like stock price, volume, time, and others.

Commodity Exchange

A commodity exchange is a marketplace where commodities and related derivative contracts are standardized and traded. The commodity exchange can be split into these sub-markets:

  • Derivatives market: this is where commodity exchanges allow futures, options, forwards, and other derivatives to be traded
  • Spot market: this is where commodity exchanges allow buying and selling of commodities in real-time (on the spot), including cash contracts

In India, there are 4 commodity exchanges that are popular and widely turned to:

  • Indian Commodity Exchange (ICEX)
  • Multi Commodity Exchange of India (MCX)
  • National Commodity & Derivatives Exchange Limited (NCDEX)
  • National Multi Commodity Exchange of India (NMCX)

Within these exchanges, the most commonly traded commodities include:

  • Crude oil
  • Coffee
  • Corn
  • Cotton
  • Gold
  • Natural gas
  • Silver
  • Sugar
  • Wheat

Free Float Market Capitalization

Full market capitalization is the market value of the total shares outstanding issued by a company, including public and private stock. This includes stock that’s locked-in and unexercised. That’s why full market capitalization is also referred to as total market capitalization.

Iceberg Order

An Iceberg Order is used to slice and execute large orders into multiple “legs”. Large orders have the potential to drastically affect stock prices and subsequently investor behaviour.

That’s why institutional investors or traders with a relatively large buy or sell order place an Iceberg Order, thus masking their total transaction value and effectively going under the radar.

Brokers and trading platforms offer Iceberg Orders as a feature, which is activated after a certain quantity of scrips or contracts are selected, typically above 100.

Blue Chip Stocks

Blue chip stocks are shares of iconic companies in India that have been leaders of their respective industries for years, if not decades, and have a stellar yet consistent business track record. Example of blue chip stocks in India are: HDFC Bank, TCS, Reliance Industries, Hindustan Unilever, Infosys etc.

Index Arbitrage

Index arbitrage is the method of generating returns by trading the difference between the same or different indices that have a standard value but has diverged momentarily. The way one does index arbitrage can vary as it is possible to trade indices via ETFs, Options, Futures, and more.



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