Liquidity
In short
How easily an asset can be bought or sold without moving the price
A liquid asset can be sold quickly at close to its value. Cash is perfectly liquid. A rare painting is illiquid. Stocks in big companies are very liquid. Stocks in tiny companies may have few buyers, so selling quickly requires accepting a lower price.
Liquidity refers to the ease of converting an asset to cash at fair market value. Market liquidity is reflected in bid-ask spreads and trading volume. In crises, liquidity dries up — even liquid assets can become illiquid. Illiquidity premium is the extra return demanded for holding illiquid assets.
Related concepts
- Bid-Ask Spread — The bid is what buyers will pay; the ask is what sellers want. If the bid is $99.95 and the ask is $100.05, the spread is $0.10. Every time you trade, you pay this spread as a hidden transaction cost.
- Volume Profile — Volume profile shows where most trading happened at different price levels. Heavy trading at a price means traders consider it fair value. Low trading zones are areas where price moves fast.
- Market Capitalization — Market cap = share price × shares outstanding. Apple at $200/share with 15B shares = $3T market cap. Large caps (>$10B) are stable. Small caps (<$2B) are riskier but have more growth potential.
- Slippage — You see a stock at $50 and hit buy. By the time your order fills, it's $50.08. That $0.08 is slippage — the price moved between when you decided to buy and when the order actually filled.