What is market liquidity and why does it matter?

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, and 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 shares, 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 characterized 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) 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 invest in online presents a small limit, it is most likely because the stock is very illiquid on the underlying market.