Understanding Market Liquidity and Your Investments
Here are some ways to limit your exposure to or manage the impact of market liquidity risk.
Overview
When it comes to securities investing, market liquidity refers to how easily you can buy or sell an investment at a fair market price when you want to. When a security is illiquid--meaning it has low market liquidity--finding a buyer when you want to sell might be difficult. You might have to accept a lower price if you need to sell quickly. In some cases, you might not be able to sell at all if no one is willing to buy at a price you're willing to accept. If you want to buy an illiquid security, you might have to pay a higher price or wait longer to find a seller.
Generally, securities with higher trading volume are more liquid. Executing a large order quickly in a low-volume security can be difficult. Additionally, illiquid investments often have a wide bid-ask spread, which is the difference between the price a buyer is willing to pay (the bid) and the price a seller is willing to accept (the ask). A narrow spread can indicate good liquidity but doesn't provide a complete picture on its own.
Details
Other factors, including how many participants are trading at various prices, can also impact a security's liquidity.
Source
Originally published at www.fool.com.