Reviewed by Gotrade Internal Analyst
Liquidity is one of those market terms people hear all the time but rarely stop to define. Yet it quietly shapes almost every trading and investing decision you make. From how quickly your order fills to how much hidden cost you pay, liquidity can be the difference between a smooth experience and constant frustration.
What Is Liquidity?
When people talk about “liquid” stocks or ETFs, they are really talking about how easy it is to get in and out of a position at a fair price.
Liquidity is how quickly and easily an asset can be bought or sold in the market without causing a big change in its price.
If you can tap buy or sell and your order fills almost instantly near the current price, that asset is liquid.
If it takes time to fill, or the price has to move a lot for your order to complete, that asset is less liquid.
Highly liquid assets tend to have:
- Lots of buyers and sellers
- High daily trading volume
- Tight bid ask spreads
Illiquid assets are the opposite. Few traders. Low volume. Wide spreads.
How Liquidity Shows Up in the Order Book
Behind every price chart there is an order book.
The order book lists all active buy orders (bids) and sell orders (asks) at different prices.
In a liquid stock, the order book is “thick”. You see many orders at each price level, and the gap between the highest bid and lowest ask is small.
In an illiquid stock, the book is “thin”. There may be only a few small orders and big gaps between prices.
This is why the same market order behaves very differently in two stocks:
- In a liquid name, it fills quickly and close to the last traded price
- In an illiquid name, it can “walk” through the book and end up filling at a much worse price than you expected
Bid Ask Spreads and Transaction Costs
The bid is the highest price a buyer is currently willing to pay. The ask is the lowest price a seller is currently willing to accept.
The difference between them is the bid ask spread.
- Tight spread (for example 100.00 bid and 100.02 ask) usually means strong liquidity
- Wide spread (for example 100.00 bid and 100.50 ask) usually means weak liquidity
For you as a retail investor, the spread is a hidden cost.
If you buy at the ask and immediately sell at the bid, you lose the spread. In a very liquid stock this cost is tiny. In an illiquid stock it can be significant even if the chart looks calm.
This is why day traders and active investors care so much about spreads.
Even long term investors are affected. Wide spreads make it harder to enter and exit at fair prices, especially for larger orders.
Examples of High and Low Liquidity Stocks
You can see liquidity differences clearly in US markets.
High liquidity examples
- Mega cap stocks like Apple (AAPL), Microsoft (MSFT) and NVIDIA (NVDA)
- Large ETFs like SPDR S&P 500 (SPY) or Invesco QQQ Trust (QQQ)
These typically have:
- Millions of shares traded per day
- Very tight bid ask spreads, often just a few cents
- Deep order books that can absorb large orders
Lower liquidity examples
- Small cap or micro cap stocks with low volume
- Niche ETFs that track very specific themes or thin markets
These often have:
- Much lower daily volume
- Wider bid ask spreads
- Orders that move the price more when they hit the market
There is nothing “wrong” with lower liquidity stocks. They just require more care and smaller order sizes.
Why Liquidity Matters for Retail Investors
Liquidity affects more than just traders. It shapes the whole investing experience.
Execution quality
In a liquid stock you are more likely to get filled close to the price you see on screen.
In an illiquid stock you can experience slippage, meaning the final execution price is worse than expected.
Ability to exit quickly
If news changes or you need cash, a liquid asset lets you exit with minimal price impact.
Illiquid assets can trap you. You may be forced to accept a much lower price to get out.
Real cost of trading
Even if a broker offers zero commission, you still pay the spread and any slippage. In liquid stocks and ETFs, these hidden costs are small. In illiquid names, they can add up fast.
Risk management
Stop loss orders and other risk tools work more reliably in liquid markets.
In very thin names, a stop order can trigger at a much worse price than you planned.
Practical Tips for Dealing With Liquidity
You do not need to become a microstructure expert to benefit from liquidity. A few simple habits can help.
Check volume before you trade
Look at average daily volume. Higher volume usually means better liquidity.
Look at the bid ask spread
Wider spread means higher hidden cost. If the spread looks huge relative to the stock price, think twice.
Use limit orders, not only market orders
A limit order lets you set the maximum price you are willing to pay to buy, or the minimum price you are willing to accept to sell.
This is especially important in pre market, after hours or in less liquid stocks.
Size your trades sensibly
Do not send an order that is large relative to normal volume. It can move the price against you.
Favor liquid names for your core portfolio
For long term investing, many people build their core around highly liquid US stocks and ETFs, then use smaller positions for more niche ideas.
If you invest with an app like Gotrade, you still interact with the underlying market.
Liquidity is provided by the exchanges and market makers, so these principles apply even when the app experience feels simple.
Conclusion
Liquidity is about how easily you can turn an investment into cash without moving the price too much. It directly affects your execution prices, hidden trading costs, ability to exit and how well your risk management tools work.
By checking volume, watching bid ask spreads, using limit orders and focusing your core portfolio on liquid US stocks and ETFs, you give yourself a smoother, more predictable investing experience.
If you want simple access to liquid US names, Gotrade lets you start investing in US stocks and ETFs from as little as 1 dollar, all from an easy to use global app.
FAQ
- How do I quickly tell if a stock is liquid?
Look at the average daily volume and the bid ask spread. High volume and tight spreads usually signal good liquidity. - Are liquid stocks always safer?
Not risk free, but liquidity makes it easier to enter and exit at fair prices, which reduces some practical trading risks. - Does liquidity matter for long term investors?
Yes. Even if you trade rarely, you still want fair entry and exit prices and the ability to sell quickly if your view or situation changes.
Reference:
- Investopedia, Understanding Liquidity and How to Measure It, 2026.
- Investor.gov, Liquidity (or Marketability), 2026.
Disclaimer:
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
