Liquidity refers to the ability to buy or sell an asset without causing a significant change in its price. In the context of stock trading, it suggests how quickly and easily a stock (or any security) can be bought or sold in the market at a price that reflects its intrinsic value.
There are two key aspects to understand. Firstly, high liquidity means there are a large number of buyers and sellers for a particular stock. This facilitates easy transactions, reducing the time to buy or sell. Second, high liquidity reduces the cost of trading because the bid-ask spread (the difference between the highest price a buyer is willing to pay for a stock and the lowest price a seller is willing to accept) is often tighter.
Stocks of large companies often have high liquidity which makes them less risky for trade. Conversely, smaller companies tend to have lower liquidity, which might cause difficulty while buying or selling without affecting the stock price.
