Glossary · Defined term
Liquidity
Liquidity is how easily an asset can be bought or sold without moving its price; liquid markets have high volume and tight spreads.
Last updated Oct 2, 2026
What it means
Liquidity is the ease with which an asset can be bought or sold without moving its price. A liquid stock trades in high volume with a tight bid-ask spread, so even large orders are absorbed with barely a ripple. An illiquid stock trades rarely with wide spreads, so a single order can push the price sharply. Liquidity is the difference between exiting at the quoted price and exiting far from it.
For investors, liquidity is a hidden cost and a hidden risk. It determines how much of your return the market takes when you trade, and it can vanish exactly when you need it: in panics, buyers disappear and even normally liquid assets gap. This is why position size should always be judged against average daily volume.
The word also describes a company's finances. A liquid company holds enough cash and short-term assets to pay its near-term bills, while an illiquid one may be profitable on paper but unable to meet payroll. Both senses boil down to the same idea: how quickly value can be converted into cash without a painful discount.
An example
For illustration, a stock trading 50 million shares a day absorbs a 10,000-share sell order unnoticed. A stock trading 5,000 shares a day might drop several percent on the same order, because there are not enough buyers at the current price.