Liquidity

A liquid asset trades often and in large volumes, with many buyers and sellers competing, so you can deal quickly at a price close to the last trade. Signs of good liquidity are a narrow bid-ask spread, a deep order book with plenty of shares offered at each price level, and high daily trading volume. Shares of large companies, major government bonds and major currencies are usually highly liquid. Shares of very small companies, some corporate bonds, property and private investments are less liquid: selling may take time or require a price cut. The word is also used for how much cash a person or company has readily available.

Liquidity matters because costs and risks rise when it is scarce. Illiquid investments tend to have wider spreads, and a large order can move the price against you. Liquidity can also vanish just when it is most needed: in a market panic, buyers step back and spreads widen even for normally liquid assets. Funds that hold illiquid assets but allow daily withdrawals can be forced to suspend dealing if many investors want out at once. Some investors accept lower liquidity in return for higher expected returns, but that only makes sense for money they will not need at short notice.