Simply put; liquidity is how easily you can sell an asset for cash. Market liquidity applies to how easy it is to sell an investment — how big and constant a market there is for it.
High market liquidity means that there is a high supply and a high demand for an asset, like a share or ETF, and that there will always be sellers and buyers for it.
In a liquid market it is easy to execute a trade quickly because there are numerous buyers and sellers. Apart from being accessible and generally easier to trade, liquid markets are also characterised by more stable prices and higher levels of efficiency.
Illiquid assets cannot be easily bought or sold, due to a lack of willing investors or speculators. Some small-cap stocks are likely to have less liquidity when compared to equities with larger market caps.
If a market is illiquid, frequent and significant price movements can occur because the supply and demand of the traded security (share or ETF) is low.
At EasyEquities our risk team actively measures liquidity as it is one of the variables that is used to determine our online transaction limits. So, if you notice that a specific stock that you are trying to trade online presents a small limit, it is most likely because the stock is very illiquid on the underlying market.
Liquidity may also impact how many shares you are able to buy in a specific company on EasyEquities. You can read more about that here.