The classic definition of liquidity involves the ability to convert an asset into cash quickly and without any price discounting. In the financial markets, particularly for exchange-traded contracts, stocks, etc., liquidity refers to the ease with which buyers and sellers can trade into and out of positions quickly and without having large price effects. A liquid security can undergo a high volume of trading without a significant change in price.
Associated with liquidity is the concept of the 'spread' which is the difference between the bid and offer price quoted by market makers. The bid price is what the market maker will pay for your shares if you want to sell them. The offer is the price at which you can buy them from him or her.
Large, liquid, stocks have narrow spreads. Small, illiquid, stocks have wide spreads.
- FUTURES LIQUIDITY, Technical Analysis of Stocks and Commodities, Feb., 2008
- "The Wonders of Liquidity, David Blitzer, Journal of Indexes
- "Will Gold Rise Still, When the Next Shock Hits? Does Liquidity Mean Confidence?" Julian D.W. Phillips, Kitco Commentaries, Sept. 7, 2007
- "Liquidity in the computerised market," Ajay Shah
- ↑ Trading Glossary. Traders Log.
- ↑ Global Investor: Glossary. Global Investor.