Liquidity, or liquid

Liquidity, or liquid, means how simply and quickly an asset or security, such as shares, can be converted to cash funds without negatively affecting its market price. High liquidity means an asset can be quickly turned into cash without impacting its value, while low liquidity means an asset can’t easily be converted to cash without affecting its value. Money is the most liquid of assets, while tangible items - like houses - are less liquid. Investors value liquidity because it provides flexibility and reduces the risk of significant price fluctuations. There are two main types of liquidity:

• Market liquidity: Where assets can be bought and sold at stable, transparent prices
• Accounting liquidity: Assesses whether there’s enough available cash to pay off debts

The US share markets are considered the most liquid in the world because of their size and the volume of shares traded. For example, on 9 Jan 2020, around 28 million Telsa shares changed hands, compare that with the 100,000 or so Air New Zealand shares that were bought and sold over the same period.

When a share has low liquidity, it's at higher-risk for price manipulation (someone can come in and place large orders in rapid succession to inflate the price and then sell off everything). Historically, this behaviour has been seen with penny stocks, which is one of the reasons why you won't see many share prices lower than US$1 on the US share markets.

Understanding an asset’s liquidity - such as company stock - is important for making informed investment decisions.