Start Here · Beginner · 5 min

Liquidity: why some assets trade easily and others don't

You can read bid, ask and spread in an order book and tell a liquid market from an illiquid one.

Easy in, easy out?

Selling sounds simple: you press a button and get the price on the screen. With some assets that is almost true. With others you find there is nobody to buy, or only at a price far below what you expected.

The difference is liquidity. It decides how much a trade really costs you, how fast you can get out, and whether the price on the chart is a price you can actually trade at.

Reading the order book

Liquidity describes how easily and quickly an asset can be bought or sold without moving its price much. The clearest way to see it is the order book, the list of buy and sell orders waiting to be filled.

The bid is the highest price a buyer is currently willing to pay.
The ask is the lowest price a seller is currently willing to accept.
The gap between the two is the spread.

If you buy immediately with a market order, you usually pay the ask. If you sell immediately, you usually get the bid. The spread is a cost you pay every time, even though it never shows up on an invoice.

Why does liquidity differ so much? Mostly because of how many people trade an asset. A widely followed company whose shares change hands all day attracts many buyers and sellers, including market makers competing to quote the best prices. A tiny company that few people follow may see only a handful of trades a day.

A liquid market has many orders close to the current price and a tight spread. The shares of large companies, the major currency pairs and big ETFs usually look like this during normal trading hours.

An illiquid market has few orders, gaps between price levels and a wide spread. Small company shares, exotic currency pairs, many small crypto coins and some complex products can look like this. Liquidity also changes over time: outside regular trading hours or in a panic, spreads usually widen, and some quotes disappear altogether.

The cost you don't see

Two fictional stocks, each with a last trade shown on the chart:

Stock A: bid 100.00, ask 100.02. Buy and sell straight back, and you lose 0.02 per share, about 0.02%.
Stock B: bid 9.50, ask 10.20, last trade 10.00. Buy at 10.20 and sell straight back at 9.50, and you lose 0.70 per share, about 7% of the price.

With 1,000 to spend, a round trip in Stock A costs about 0.20. In Stock B it costs about 69, before the price has moved at all.

It gets worse with size. If you want to sell a larger amount of Stock B, there may not be enough buyers waiting at 9.50. Part of your order then fills at 9.30 or 9.00, further below the price you saw on the chart.

Common mistakes

Trusting the last price. The chart shows the last trade. What you get depends on the bid and the ask right now.
Ignoring the spread. It is a cost on every trade, and it adds up quickly for anyone who trades often.
Using market orders in thin markets. They fill against whatever orders exist, possibly far from the last price.
"Liquidity is permanent." In a crisis, buyers can disappear even from markets that are usually liquid.
Confusing liquid with safe. A liquid market makes it easy to get out, but it does not stop the price from falling.
Forgetting the spread when you judge a result. A trade that looks like break-even on the chart has still lost the spread.

The takeaway

A price is only real if someone will trade at it. Check the spread and the depth before you trade, not after.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the spread in this order book.

Tap the chart.

The spread is the gap between the best ask above and the best bid below. Here it is 0.70, a wide spread.
2A stock shows a bid of 20.00 and an ask of 20.10. What is the spread?

The spread is ask minus bid: 20.10 − 20.00 = 0.10.
3You want to buy right now at the market price. Which price do you usually pay?

An immediate buy fills against the sellers waiting at the ask. An immediate sell fills against the buyers at the bid.
4Why can a market order in an illiquid asset be expensive?

With few orders in the book, a market order can work through several price levels before it is complete.

of 4 correct.