How do we define liquid and illiquid stocks? By bid-ask spread? By transaction volume? How?

Question

I read we can define illiquid stocks by its bid-ask spread. If its bid-ask spread is bigger than 5% from its price we can define it as illiquid stock. But, how do we define illiquid stocks by its trading volume? Or how we define illiquid stocks by its daily transactions?

Answer 1

The higher the trading volume ,
The more liquid it is ( easier to sell ) .
The narrower the bid ask , the more liquid .

Lower trade volume , or wider bid - ask means
Harder to sell , sooooo , more illiquid .

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Answer 2

you also have to consider your probable position size.

if you are running a mutual fund and your target position size is 200 million USD, there are a lot of stocks whose average daily trading volume is small relative to this figure and thus are illiquid from your viewpoint.

trying to trade even 1/10th the average daily volume will almost certainly move the price away from you.

I quantified this as follows: there are about 400 minutes is a trading day. a stock might be considered liquid enough if you can get a fill on a slow day within 5 minutes. since a slow day might well have only 20 to 40% of the daily average volume, you might decide that your position limit will be 1/400th of the average daily volume [if this is less than your money management limit].

very illiquid stocks will have significant time period gaps in the detailed trading records when no shares change hands. If you have access to this level of detail and see periods of minutes go by without any trades, you know these shares are illiquid. [btw, in such circumstances, the average daily volume is unreliable because a few larger trades dominate the statistics. My rule of thumb for this situation is to either stand aside or divide by 4000 instead of 400.]


GL

Answer 3

1

Answer 4

The bid is what people are willing to pay and ask is what owners are trying to sell it for. So with the decline, sellers are trying to get as much as they can for it, and there may be a lack of buyer interest, uncertain if it will bounce or continue lower. You have to be careful about putting to much emphasis on bid/ask spread while normal markets are closed, because people may have thrown wild prices out there during aftermarket hours just to see if they could get a nibble. Due to low volume limit orders then, there may have been little or no trading near those prices.

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Answer 5

Illiquid Stock

Answer 6

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Answer 7

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