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What Is Liquidity?

The ease with which an asset can be bought or sold without significantly affecting its price.

Liquidity measures how easily an asset can be traded at or near current market prices. High-liquidity assets have tight bid-ask spreads, deep order books, and minimal slippage even on large orders. Low-liquidity assets show wide spreads, shallow books, and substantial slippage.

Liquidity varies by asset, time of day, and market conditions. SPY is more liquid than a $500M-cap stock. Trading hours are more liquid than premarket/after-hours. Calm days are more liquid than volatile ones.

Traders should match their style to the liquidity available. Scalpers need ultra-liquid instruments because their edge per trade is tiny and slippage eats it. Swing traders can afford less liquid names because their per-trade returns are larger. Avoid trading more than ~1% of average daily volume in any single order unless using execution algorithms.

Related terms

• Slippage — The difference between the expected fill price of an order and the actual execution price.
• Bid-Ask Spread — The gap between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask).