What is Liquid Stocks and How to Identify Liquid Stocks

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Saurabh Guptahttp://karekaise.in
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What is Liquid Stocks and How to Identify Liquid Stocks, What is Stock Liquidity, Is it Right to Buy Liquid Stocks .We often hear that we should not buy a stock which does not have liquidity but this is not always true.

We need to know what is the reason if a stock is not liquid. It is very important for you to understand the liquidity of stocks, only then you can buy a good liquid stock.

So to know about all this, read this post carefully, let’s start:

What is Liquid Stocks?


Liquid stocks refer to the ease with which a stock can be bought or sold without affecting the price of the stock. Meaning the stocks in which many buyers and sellers are interested are called high liquidity stocks or liquid stocks.

Similarly, stocks in which fewer people are interested are called low liquidity stocks or illiquid stocks.

The charts of liquid stocks always move smoothly. That is, there is not much gap or space between the movement of the graph. These are the same stocks that are traded a lot.

Whereas there is a lot of volatility in the price movement chart of stocks which are not liquid, that is, the charts appear suddenly above and sometimes suddenly below.

That is why there is a lot of space between the movement of their graph. The price of such stocks is very low and we also call them penny stocks or illiquid stocks.

What is the liquidity of stocks?


Before knowing the liquidity of stocks, we have to understand the liquidity-

The Hindi meaning of liquidity is ‘liquidity’ which means that it moves like water. But liquidity in the stock market is related to ‘simplicity’ and not ‘liquidity’.

Meaning if market participants i.e. buyers and sellers have ease in trading in a market, then we can say that that market is a liquid market.

Trade means (buy and sell)

So liquidity shows us how easily any asset can be converted into cash. Such as- House, Building, Furniture, Machines etc.

Let us tell you that the liquidity of every asset is different like; Cash has the highest liquidity, followed by gold and then stocks have the least liquidity. But the lowest liquidity is in things like modern arts or equipment, meaning things that are very difficult to sell.

Definition of Stock Liquidity

How easily we can buy or sell any stock without Imapact its price. Meaning our Buying or Selling should not have much effect on its price.

So any stock is liquid or illiquid for you, it depends on how much quantity you want to buy it.

Quantity means: Number of Shares means how many shares you have bought.

Example: Suppose you have to buy only 100 shares of a stock, then you will not make much difference with its trading volume even if its trading volume is less.

But if you want to buy 10000 or 50,000 shares of that stock then you have to look at the trading volume first.

Should I invest in low liquidity stocks?


You are often told that you should not invest in low-liquidity stocks, but why are you told so?

The first reason behind that is that you are deliberately kept away from such stocks.

You must have seen that the stocks which become multibagger in the beginning their volume is also less because in the beginning only big investors and companies invest in it and buy many of its shares alone.

But when the volume and price starts increasing, then gradually the attention of retail investors like you and us also goes towards these stocks.

The second reason is that you are told everywhere to buy only liquid stocks because these are hot stocks, so the chances of you incurring losses are also high.

My advice is to stay away from hot stocks as much as you can. Do not buy it in greed because their price and volume suddenly increase due to some news and they get liquidity but after some time their price suddenly gets dumped due to which many investors have to suffer.

How to know the liquidity of stocks?


There is no standard definition or any official measurement to find out the liquidity of a stock, so that we can tell just by looking that the liquidity of this stock is high and its low.

We cannot say that the volume of a stock should be a certain volume, then only that stock will be liquid or illiquid For example: 5 lakhs, 10 lakhs or 50 lakhs.

The liquidity of a stock depends on many things like: market cap, trading volume, price charts, spreads etc. By looking at which you can know whether a stock is liquid or illiquid.

#1 Method to identify liquid stocks

So the first way to find out stock liquidity is by looking at the market capitalization of the stock.

Market capitalization means that the total market value of the company tells you how big the company is.

Some people feel that stocks should be bought only by looking at the liquidity of the stock. If the stock liquidity is less then it should not be bought but this is not true every time.

#2 Method to identify liquid stocks

Another practical way to find out the liquidity of a stock is by checking the spreads of the stocks.

Spreads means the difference between Bid and Ask. That is, at what price the Buyers are ready to buy and at what price the Seller is ready to sell, then the difference between these two is called ‘Spreads’.

Spreads are very less in Higher Liquidity Stocks and Spreads are much wider in Lower Liquidity Stocks.

#3 Method to identify liquid stocks

The third way is to check the liquidity of the stock: by looking at the intraday charts of the stocks.

On the charts of Higher Liquidity Stocks, the price flows like water, which means that you will not find any breaks in the middle as you can see in this chart of infosys company.

Now compare this chart with the chart of this small cap company given below, which looks like someone has made small sticks on paper.

And this is because buyers are so few in these that prices in such stocks tend to falter instead of flow.

#4 Method to identify liquid stocks

The fourth and most important way is to find out the liquidity of a stock: which instrument you are trading.

As you know, the equity or cash segment has the highest liquidity. After that Futures have less liquidity than that and then Options have lowest liquidity.

Now there are many variations in Futures and Options also. like; If you look at the futures of companies like Nifty, BankNifty, TCS or Reliance, then you will get a lot of liquidity in them.

But apart from these, there are many such stocks in which you will get very less liquidity in futures and options.

So my advice to you would be to check the liquidity of the stock before trading.

WHAT DID YOU LEARN TODAY


I hope you have liked my article on What is Liquid Stocks and How to Identify Liquid StocksIt has always been my endeavor to provide complete information about the future of stock market to the readers, so that they do not have to search any other sites or internet in the context of that article.

This will also save their time and they will also get all the information in one place. If you have any doubts about this article or you want that there should be some improvement in it, then you can write comments below for this. this is only for educational purpose.

 

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