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StocksGlossary

Liquidity

Liquidity is how easily an investment can be bought or sold without moving its price. Plain-English definition, how spreads show it, and why it matters.

Also called: marketability

By The Token Thesis Desk2 min read4 cited sources

Two people in silhouette watching a large electronic board of share prices at night
“Shinko Securities's electronic stock board nearby Yaesu side of Tokyo Station in March 2009” by Kondo Atsushi — CC BY-SA 2.0 (edited: cropped, recolored)

Quick answer

Liquidity is how easily and quickly an investment can be bought or sold without substantially moving its price. A liquid stock trades often with a narrow gap between bid and ask; an illiquid one can be hard to sell when you want to.

What does liquidity mean for investors?#

The SEC's Investor.gov glossary says liquidity generally refers to how easily or quickly a security can be bought or sold in a secondary market[1]. For a stock, it refers to how rapidly shares can be bought or sold without substantially impacting the stock price[1].

The flip side is liquidity risk: the risk that investors won't find a market for their securities, which may prevent them from buying or selling when they want[1]. Investor.gov warns that stocks with low liquidity may be difficult to sell and may cause a bigger loss if you cannot sell when you want to[1].

How can you see liquidity in a quote?#

One visible sign is the spread — the difference between the bid (the highest price a buyer will pay) and the ask (the lowest price a seller will accept)[2]. Spreads tend to be narrow where many buyers and sellers are active, and wider where few are. The SEC notes that the reduced trading interest in extended-hours sessions generally results in wider spreads[3].

Worked example

Two stocks, both bid at $25.00

Busy Co is quoted $25.00 bid, $25.01 ask. Quiet Co is quoted $25.00 bid, $25.40 ask. Buying 200 shares at the ask and selling them straight back at the bid costs the spread each time:

StockSpreadSpread as % of midpointCost of an instant round trip, 200 shares
Busy Co$0.010.04%$2.00
Quiet Co$0.401.59%$80.00

Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.

Why does liquidity matter when you trade?#

In a less liquid stock, a large market order may fill at several prices; the SEC notes that parts of a large market order may execute at different prices due to lack of liquidity[4]. That is why a limit order is often the safer choice there — see market vs limit orders.

For where prices and spreads come from, read how stock exchanges work. A related size measure is market capitalization.

Sources

Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).

  1. 1
    Liquidity (or Marketability) (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  2. 2
    Bid Price (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  3. 3
    Extended-Hours Trading: Investor BulletinU.S. SEC — Investor.gov (2022) · Grade A
  4. 4
    Understanding Order Types (Investor Bulletin)U.S. SEC — Investor.gov (2017) · Grade A

How we checked this note

Every number, date and rule above links to its source. This note cites 4 sources, 4 of them primary (Grade A). Worked examples were calculated in code, and a second editor compared each figure with its source before publishing. Spotted an error? Tell us — corrections are listed on the note. Read our editorial policy.