Liquidity refers to how easily a stock can be bought or sold without causing a significant change in its price, determined by how many active buyers and sellers are present at any given time.
High vs Low Liquidity
- High liquidity (e.g., large-cap, heavily traded stocks): many buyers and sellers, so even large orders tend to have a smaller price impact.
- Low liquidity (e.g., thinly traded small-cap stocks): fewer participants, so a single large order can move the price significantly.
Related Reading
See why liquidity affects price volatility in How Stock Prices Move: Demand, Supply, and Market Sentiment.