Dictionary

Liquidity

How easily you can buy or sell a meaningful size without moving the price against yourself.

The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

A liquid market has many buyers and sellers, a tight bid-ask-spread, and enough depth in the order-book that a normal order fills at close to the quoted price. An illiquid market has wide spreads, thin size, and large slippage.

Liquidity matters most on the way out. You can always get into a trade; getting out of a large position in a thin stock or an out-of-the-money option can cost far more than you expect.

Example: an ETF trades 50 million shares a day with a one-cent spread; a small-cap trades 80,000 shares a day with a 15-cent spread. A 5,000-share exit is trivial in the first and about 6% of daily volume in the second.

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