Liquidity is how fast you can buy or sell an asset without affecting its price. Assets have different degrees of liquidity:
- Cash is the most liquid asset because you can immediately and easily transform it into other assets.
- Stocks, especially those traded on major exchanges, can be quickly sold and converted into cash, often within a single trading day, which makes them highly liquid.
- Real estate properties, such as homes or land, are less liquid because the sales process can take weeks or even months, and significant transaction costs can be involved.
- Collectibles like art and antiques are often illiquid as their value and demand can be subjective. Finding a buyer might take an extended period, especially if the collectible is unique or rare.
Example: Let’s say you want to buy $1,000 worth of Tesla stock. You don’t have $1,000 on hand, but you own a painting that’s worth that amount. To get $1,000 in cash, you’ll have to sell your painting. But you may have to sell it at a discount if you need cash right away or can’t find a buyer willing to pay your desired price. So, a painting isn’t a very liquid asset.
Note that Trading 212 only offers access to real stocks and ETFs (via the Invest/ISA platform) and CFDs.
What is market liquidity?
Market liquidity is how quickly an asset can be sold without changing its price or incurring high costs. The faster you can buy or sell a stock, the more liquid it is.
- Higher market liquidity means more buyers and sellers exist, so it’s easier to make a transaction. This means it’s more likely that you’ll be able to trade when you want.
- Lower market liquidity means fewer buyers and sellers, so it’s harder to make a transaction. For example, you may not be able to sell your shares when you want.
Higher liquidity is directly related to a smaller buy-sell spread since more market participants, buyers and sellers, are present. The fewer buyers and sellers, the larger the buy-sell spread.