Liquidity

Investing glossary · Risk and statistics

How quickly and cheaply you can buy or sell an asset without moving its price.

Definition

Liquidity describes how easily you can turn an asset into cash, or cash into an asset, at a price close to the last one. In a liquid market there are many buyers and sellers at all times, so trades are cheap and fast. In an illiquid one, selling a meaningful amount can push the price down.

The simplest sign of liquidity is the bid-ask spread, the gap between the highest price a buyer offers and the lowest price a seller asks. Large companies trade with spreads of a cent or two; small and obscure ones can have spreads of several percent, a cost you pay on every round trip.

Worked example

Illustrative numbers

A liquid stock might show a bid of $49.95 and an ask of $50.05: a spread of $0.10, or 0.2% of the price. A thinly traded stock could show $9.70 and $10.30: a spread of $0.60, which is 6% of the price before the stock has moved at all.

These numbers are illustrative; the point is that the same trade costs far more in an illiquid stock.

How ATLAS uses it

ATLAS calibrates its ranges separately for US stocks, foreign stocks and very small foreign companies, because thinly traded stocks behave differently. The Trading Desk values orders at real market prices.

Frequently asked questions

Why is liquidity important?

Because it determines your real cost of trading and whether you can exit when you need to. A cheap-looking illiquid stock can be expensive to sell.

Are ETFs liquid?

Large ETFs are usually very liquid, but liquidity depends on the ETF's own trading and on how easily its underlying assets can be traded.

Related terms

Put the idea to work on your own stocks

Open any company in ATLAS to see its fair value, its odds of rising and its risk numbers side by side.

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Not investment advice. ATLAS estimates are produced by statistical models from public data; they can be wrong and past performance does not predict future results. Consider your own situation before investing. Disclaimer