Brainy's
Share Market Toolbox



Stock liquidity

For every seller, there needs to be a buyer.

If we want to sell a company's shares for a good price at a time that suits us, the shares need to be "liquid".
Without enough liquidity in the shares, we might be stuck
with unwanted shares, or forced to sell at an unreasonable price.

Introduction

Many newish share traders potentially fall for a number of traps in the early days of their trading. One of these is to do with stock liquidity. It doesn't matter whether you are buying shares for shorter term profits, or for longer-term investments, you will want to make sure you can sell the shares at a moments notice. To do this it will be important to have buyers available to take your stock when you want to sell it.

It is important to realise that with many stocks, there are times when there is a shortage of buyers. So you might have to wait for hours to find a willing buyer, or even days, and then sell at a price which is well below your desired sell-price.

Liquidity - how to measure it?

There are three common ways to measure the liquidity of the shares in a company:

  • Volume - of shares traded in a day or week.
  • Trades (number of buy/sell transactions) - in a day or week.
  • Sales value (the dollar value of shares that are transacted) - in a day or week.

Safe liquidity level to invest/trade?

For the use of investors or traders there are some guidelines regarding each of the three measures of liquidity listed above. In some cases, the safe value is dependent on the intended position size of your parcel of shares.

More details about these so-called safe levels are included in the eBook Articles.

List of liquid tradeable stocks?

Once we know and understand this issue of liquidity, it is easier to compile a list of liquid and tradeable stocks. This list could then form the basis of our watch list. Instead of scanning all stocks in the market, or all stocks in one or two indexes, we could scan our list of liquid tradeable stocks.

A scan of all 2000+ stocks in the Australian equity market in Septermber 2011 produced a list of liquid tradeable stocks no longer than 400 - depending on how strict our liquidity criteria and intended position size.

Robert's Liquid List

As a part of his own trading routine, Robert has his own list of liquid stocks, and refreshes it monthly. It is available for Premium Toolbox Members to download, with detailed explanatory and background information. See details here.


Download Robert's Liquid List

Premium Toolbox members can download
Robert's own Liquid List - see the details here.

Problem scenario

Let's say we want to buy 10,000 shares in a (fictitious) company called XYZ. On the share market, we have noticed that every week for the last few weeks there are been about 6 buy/sell transactions each day (ie. 6 "trades"), and the share price is roughly constant at about 10 cents. Some days it goes up to 11 cents, and some days down to 9 cents. But we are convinced it is worth twice that. So we want to invest in the company and wait for the market to realise that it is worth double the current price.

So we bought 10,000 shares at 10cents, for a total of $1,000.

Then one day there is a bad news announcement, and the future for the company looks a little grim, so we decide to sell our shares. But the share price has fallen to 8 cents and the few buyers in the market are happy to buy for only 5 cents.

We have learnt the hard way here that the shares in this company are not very liquid.

More information

For more information about liquidity, see
some of the eBook (PDF) Articles:

And whatever you do,
beware of the sharks in the ocean!

 Beware the sharks in the ocean.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.


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Last revised: 26 December, 2011.