In simple words, liquidity in stocks mean that how fastly you can buy or sell a stock in the stock market….🌺
If you want to know what liquidity is in stock market and about related terms to it then this post is for you because through this post, I am going to explain all these things briefly but in simple terms….
So, without further delay, let’s start this post….⤵️⤵️
What Liquidity is in Stock Market?
Liquidity simply means that how fast you can enter and exit in a stock without any delay not a delay of a milliseconds….🌺
Liquidity is directly related to volume in a stock, higher the volume higher the liquidity and lower the volume lower the liquidity…
For example, a stock which has one million daily traded volume is more liquid than a stock which has daily traded volume of just 100k…🌺
And it means you can easily buy and sell stocks in the stock with one million volume than the stock with just 100k volume
And liquidity is really important in stock market because it can literally help you to stay away from stocks which are manipulated….🌺
Types of Stocks in Stock Market On The Basis Of Liquidity
There are two types of stocks in stock market on the basis of liquidity and these are as follows:⤵️
1. Liquid Stocks
Liquid stocks are stocks with very high daily traded volume like Apple, Tesla, Google, etc.🌺
Sometimes liquid stocks are also called as high liquid stocks…
Apple, Tesla, & Google are liquid stocks then it doesn’t mean that only these three stocks are liquid stocks, in reality there are thousands of shares in stock market which are liquid…..🌺
To know if a stock is liquid or not, volume is the biggest criteria, high volume means high liquidity and low volume means low liquidity…..
2. Illiquid Stocks
Illiquid stocks are stocks with very low daily traded volume like there is very less daily traded in these stocks like only 1000 shares or 10000 shares only….🌺
These stocks are also known as illiquid stocks….
For retail traders, it is good to not trade in illiquid stocks because they can stuck in that stock due to less volume and if they don’t exit on time then it can cause loss to them….🌺
So, make sure to trade only in liquid stocks for faster entries and exits…👍
Why Liquidity is Important?
There are many reasons why liquidity important and some of them are as follows:⤵️
1. Faster Entries & Exits
High liquidity means faster entries and exits and this further means that you can enter and exit a stock really fast…🌺
And this advantage is not only important for day traders but also important for swing traders and investors i.e they can also buy stocks for swing trading & investing and can rebalance or sell their investment in no time….
2. Enter & Exit At Your Desired Price/Current Market Price
For scalpers & day traders, entering and exiting the position at their desired price is really important and they can only do this if there is enough liquidity in a stock…🌺
But due to less liquidity, if they are not able to enter or exit at the desired price then this can cause loss to them….
So, high liquidity is really important for you especially if you are a scalper or a day trader….🌺
Desired price here doesn’t mean you can buy 100$ stock at 95$, instead desired price here means that you can buy at curry market price or live price….
3. Less Chances Of Manipulation
If a stock is liquid i.e it has decent amount of daily traded volume then it is very hard for the manipulators to manipulate that stock due to larger participation of retail traders….🌺
But if a stock is liquid i.e it hasn’t decent amount of volume then it is very easy for manipulators to manipulate it and that’s why manipulators choose low volume or illiquid stocks….
4. Liquid Stocks Always Follow Technical Analysis
Yes, liquid stocks always follow technical analysis and that’s why I like liquid stocks a lot…🌺
And this also the reason why you should avoid illiquid stocks because they usually don’t follow technical analysis and can cause you loss in trading if you trade in them….
5. You Can Easily Place Larger Orders in Liquid Stocks
Yes, some day traders trade in large quantities like 1000 or 5000 shares at a time so if they place such order in a illiquid stock then the order won’t be placed or will take too much time to execute due to less buyers and sellers in that stock….🌺
Whereas if they place the same order in a liquid stock then their order will be executed in seconds due to high volume aka too much buyers and sellers…
That’s why day traders always prefer high liquid stocks…🌺
6. Good One Sided Moves During Day Trading
Do you know, when day traders make good money?🌺
If no then let me tell you that day traders make good amount of money in one sided moves and high liquid stocks mostly give many one sided moves during day trading….
Whereas, illiquid stocks mostly consolidate in a narrow range which is not good for day traders….🌺
So, in day trading liquidity is really really important….
7. Institutional Investors, Mutual Funds, Pension Funds, Market Makers, Smart Money Etc. Participate Only in Liquid Stocks
Yes, institutional investors, smart money, etc. always participate in liquid stocks and they never touch illiquid stocks….🌺
So, if you are a trader like me who analyse a lot where institutional investors and smart money are investing their money then you can cut off illiquid stocks from your list which can save your time too….
So, from here one thing is sure that if institutional investors and smart money always work in liquid stocks then liquidity is really important for retail traders too….🌺
And these were the reasons why liquidity is important, I hope you liked them…
FAQ’s
#1 What is low liquidity in stocks?
Low liquidity refers to the less volume in a stock, and these type of stocks arek nown as illiquid stocks and it’s not good to trade in them….👍
Next post is about how to know if a stock is liquid or not, is if you are interested then you can check that post too in ‘technical analysis’ category of my site….🌺
Will see you again, till that take care, stay ahead and stay profitable….
Bye and peace…👍🌺