liquidity

In financial markets, 'liquidity' refers to the ease of dealing in a security - whether shares, options, warrants or some other instrument. Another way of looking at it is - how easily can the shares can be bought and sold without significantly moving the price?

In general, large companies, with hundreds of millions of shares in issue, and high numbers of shares changing hands every day, have good liquidity. If you are selling or buying a parcel of 5,000 shares in AstraZeneca, for instance, your broker won't have any trouble dealing the order.

In contrast, small companies with few shares in issue and thin trading volumes, can have very poor liquidity. If you try to sell 5,000 shares in a small company trading on AIM or OFEX, you may have difficulty actually getting the trade done.

Associated with liquidity is the concept of the 'spread' which is the difference between the bid and offer price quoted by market makers. The bid price is what the market maker will pay for your shares if you want to sell them. The offer is the price at which you can buy them from him. Large, liquid, stocks have narrow spreads (a good thing). Small, illiquid, stocks have wide spreads (a bad thing).