Glossary
Liquidity
How easily something can be turned into cash near its quoted price, without the act of transacting moving that price.
A heavily traded large company is liquid: orders sit stacked on both sides at all times, so an ordinary-sized order fills instantly at roughly the price on the screen. A rarely traded small one is not, and the same order may have to walk through several price levels to find enough shares, so the fill arrives some distance from the quote.
Liquidity is visible before it is needed. Daily volume says how many shares change hands, the bid-ask spread says what the crowd is charging for immediacy right now, and the free float says how many shares are genuinely available rather than locked up. A company that is large by market cap can still trade thinly if most of its shares are held tightly.
It is not a constant. The same stock is liquid at 10am on a Tuesday and thin at 4:30pm, and liquidity across a whole market has tended to be scarcest on the days it is most wanted, when a great many people want to transact in the same direction at the same time.
Related terms
- Bid-Ask SpreadThe gap between the highest price a buyer is offering and the lowest a seller will accept, usually quoted in cents per share.
- VolumeHow many shares changed hands over a period, usually reported as the total traded during a single day.
- FloatThe number of a company's shares actually available to trade, once restricted and closely held stock is excluded.
- Market Cap (Market Capitalization)What the whole company is worth at today's share price: the price per share multiplied by the number of shares.
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