what is the connection between liquidity and stock prices?

Answer 1

Liquidity ensures more buyers and sellers for the stock. That ultimately means that there is more demand and supply. It is simple economics to state that price is a factor of demand and supply, thus is the correlation between liquidity and stock price.

Answer 2

There are several measures of liquidity. One, that can be observed by investors, is the Bid-Ask Spread. The bid price is the price that marketmakers are willing to pay to buy the stock and the ask price is the price at which they will sell. The bid-ask spread is the difference between these two stocks.

So, if you see one stock with bid and ask prices of 19.98 and 20.02 and the other with bid and ask prices of 19.75 and 20.25 you can conclude that both are worth about $20 and the first one is much more liquid than the second.

Answer 3

Liquidity for this purpose means you should be able to sell and buy easily. If a particular stock is not liquid, then you may not be able to sell as soon as you want.

For liquid stocks the spread between bid-ask will be less. Those stocks will attract more investors/traders. These liquid stocks will not have too much of difference in price quoted.

Answer 4

Onceuponatime has the correct idea, however to elaborate; liquidity is a rough measure of the amount of money made available by potential buyers who might want to buy the stock from those who decide to sell. Price is almost always the trigger mechanism that makes any deal work. If you want to sell something and there are no buyers, how can you sell something that nobody wants to buy? That is the extreme fear of the owner of an illiquid investment. You are stuck owning it forever without a buyer, in theory. In reality, one can always find a buyer for almost anything by simply lowering the price until a buyer steps forward and the deal gets done.