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Financial Liquidity

 

What Is Liquidity?

The liquidity of an asset describes how quickly it can be converted into another asset, typically cash, at fair market value. Currencies are generally the most liquid assets because they are broadly used within an economy to purchase and sell goods, services, and investments.

Relative to other currencies, individual currencies are more or less liquid, depending on exchange rates and availability of buyers and users of the specific currency.

Liquidity Spectrum

The spectrum of liquidity runs from highly liquid cash to illiquid physical objects that are rare and difficult to exchange or convert. Liquid assets are easy to transfer to another entity in-person or through a financial institution.

Conversely, illiquid assets, such as, for example, a very large and heavy fine art sculpture, may be difficult to liquidate because at any given time, finding a buyer for the sculpture could be problematic. As well, transferring the asset would require heavy machinery, specialized personnel, and complicated logistics.

What Drives Stock Market Liquidity?

Market liquidity also varies as a result of the number of buyers and sellers an asset attracts. Large capitalization stocks are typically very liquid due to a sizable pool of interested buyers and sellers; stockholders can quickly convert the security into cash at a fairly predictable price.

Small capitalization stocks are more likely to be illiquid due to a lack of interested buyers willing to pay what is generally considered the fair market value of the stock.

To a large degree, volume (ie the number of shares being exchanged) and the difference between the bid (what buyers want to pay) and ask (what sellers want to receive) are critical components of the liquidity of a security, although these components are not necessarily a function of market capitalization. For instance, if the stock of a small company becomes popular, it may become very liquid if the volume of shares traded rises and the bid-ask spread is tight. On the other hand, stock in a large company can become illiquid if dramatic news increases the spread between the bid and ask while the volume of trades decreases.

Finding Information About Liquidity on Investing.com

At Investing.com the main page of each security includes information about trade volume as well as bid and ask prices.

For example, on the Apple (NASDAQ:AAPL) stock page, the bid/ask range is listed above the chart, as is the day’s range. Volume information can be found both above and below the chart.

aapl bid-ask range

A market with high volume and a narrow spread between the bid and the ask is considered to be a liquid market. The equities section homepage on Investing.com includes a sortable volume column that can be filtered by clicking on the column heading to find high and low volume markets.

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