Liquidity

In financial markets, liquidity refers to the ease of dealing in a security Ð whether shares, options, warrants or some other instrument Ð and turning them into cash. Another way of looking at it is Ð how easily can the shares be bought and sold without significantly distorting the price? In general, large companies, with hundreds of millions of shares in issue and high numbers of shares changing hands every day, have good liquidity. In contrast, small companies with few shares in issue and thin trading volumes can have very poor liquidity. Associated with liquidity is the concept of the spread Ð the difference between the bid and offer price quoted by market makers. The bid price is what the market maker will pay for your shares if you want to sell them. The offer is the price at which you can buy them from him. Large, liquid, stocks have narrow spreads (a good thing). Small, illiquid, stocks have wide spreads (a bad thing). The opposite is illiquid. Liquidity also refers to the ease and rate with which an asset can be converted into a medium of exchange. Liquidity is considered to be advantageous. Money is the most liquid due to the fact that it does not need to be converted into anything in order to make purchases.