liquidity
How easily you can buy or sell without moving the price; a liquid market has many orders and a small spread.
Liquidity is how easily an instrument can be bought or sold without moving its price much. Markets with many available buy and sell orders are usually more liquid; markets with few orders can be harder to trade smoothly.
Liquidity can vary by instrument, time, and order size. A narrow spread may be one clue, but it does not guarantee that a large order will fill at one price. Lower liquidity can increase the chance of partial fills or slippage.
Example
In a practice snapshot, Harbor 20 Index Fund has 100 units offered at $10.00 and another 100 at $10.10. An order for 50 units could be filled at $10.00, costing 50 × $10.00 = $500 before fees. Spark Coin has only 20 units offered at $10.00 and the next 30 at $10.50. An order for 50 units would cost 20 × $10 + 30 × $10.50 = $200 + $315 = $515 before fees, an average $10.30 per unit. These invented order books show how available quantity can affect a fill.
Common mistakes
- Equating high trading volume with guaranteed liquidity. Volume is historical; available orders can change.
- Assuming a small spread means any order will fill at the same price. Size matters.
- Ignoring the time of day or market conditions. Liquidity may thin out.
- Forgetting that execution costs affect results. Most people who trade lose money.
Learn it in the course
- Bid, ask, spread and liquidity · Read the two prices on every screen, see why thin markets and odd hours cost more, and what a big market order does to a thin order book.