Liquidity is how fast and easy it is to buy/sell the stock.
This is determined by:
• How easily an order is filled for the stock (a pink sheet stock order is more difficult to fill than a S&P500 stock)
• How fast you can buy/sell the stock - After you place the order, is it filled in a couple of seconds, or do you have to wait minutes to hours? A liquid stock is easily sold faster than a illiquid stock.
• How many people trade that stock - The more traders of the stock, the more liquid the stock is, as it will be easier to find a willing buyer/seller at the market price.
• Does your buy/sell order affect the stock price - an illiquid stock such as a pink sheet will not have many willing buyers/sellers, and subsequently, a buy/sell order placed by you can significantly affect the price.
An example of liquidity outside of stocks would be this:
A house is not very liquid, because:
- it takes many months to sell
- houses often have haggling involved in the sale/purchase, which can often affect the price.
- Only a few people will be buying/selling the house
- It usually requires a realtor to buy/sell the house, and still a lot of effort after that.
Foreign Currency (not forex for the sake of this example) is usually very liquid, because:
- You just need to go to the bank or a currency exchange outlet
- It's instant disregarding the time it takes for the transaction with the clerk
- You're order will not affect the price
- Everyone in forex will be buying/selling the currency.
- It nearly takes no effort.
In stocks, a test for liquidity can be by looking at the daily trading volume. The more shares traded usually means the more liquid it is. However, for penny stocks, many of which have high volumes simply because of their low price, you may have to watch out.
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It is definitely better to trade with liquid stock, because you won't be causing the price to change severly just by placing an order, and you will be able to exit/enter easily in a short timeframe.
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The more liquid the stock, the easier it will be to trade with a large number of stocks, as you will be able to fill orders fully more easily. If a stock is illiquid, or not 'viscous', then you will only be able to get partially filled orders when trading large numbers, and your orders will force the price all over the place.
Stay out of day trading; you still have a lot to learn.... [italics] A lot [italics]....