Starting out
Liquidity
How quickly you can turn something into cash at a fair price, without moving the price against yourself.
How it works
A large listed share is highly liquid: thousands of buyers exist at any moment and selling has almost no effect on the price. A flat, a private company stake, or a thinly traded small-cap is not: finding a buyer takes time, and needing to sell quickly costs you real money.
Liquidity is not a fixed property. It is highest when nobody needs it and evaporates in a crisis, which is when the difference between a liquid and an illiquid holding stops being theoretical.
Where it misleads people
Illiquid assets often look less volatile purely because they are priced rarely. A holding valued once a quarter has a smooth chart and exactly the same underlying risk as one priced every second.
Related terms
- Bid-ask spreadThe gap between the highest price anyone will pay and the lowest price anyone will accept.
- VolumeThe number of shares or contracts traded in a period — a measure of how much activity there was.
- Market makerA firm that continuously quotes both a buy and a sell price, so there is always someone to trade with.
- SlippageThe difference between the price you expected and the price you actually got.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.