What market liquidity is
Liquidity is how much you can buy or sell, how fast, without pushing the price against yourself.
Three faces of the same word
Tight spread: the gap between the best bid and the best offer is small. Depth: there is size sitting on those books, not just one share. Resilience: after a large print, the book refills instead of staying empty.
A name can look liquid at 11:00 on a quiet Tuesday and look empty in the last twenty minutes of an event day. Average daily volume is a clue, not a guarantee that your order will be a small piece of that volume when you need to exit.
Why researchers care
A backtest that assumes you traded the closing print on a thin name is often too kind. The real fill may be worse, or the size you wanted may not exist. That is one reason cost assumptions should be larger on jumpy, low-float names than on mega-cap names.
Liquidity can vanish when many people want the same side at once. That is when “I will just get out” stops being a plan.
Practical checks
Look at typical spread, recent dollar volume, and whether your intended size is a small fraction of that volume. If you need more than a few percent of a day’s volume, you are not a price taker anymore. You are part of the tape.
Key takeaways
- Spread, depth, and resilience are the three things people mean by liquidity.
- Averages hide the minutes when you actually have to trade.
- Thin names need larger cost and size humility in any study.