In order for you to sell your stocks someone has to be ready to buy them. Luckily, you don’t need to come across this purchaser as it electronically occurs nearly instantaneously once you enter your trade arrangement. There are institutions in place to facilitate these transactions to produce and keep the marketplace structured. This is what’s called liquidity. Liquidity is the degree to which stock or some other financial asset could be quickly bought or sold. If a stock could be sold quickly then it is considered liquid. If it cannot readily be sold then it is deemed illiquid. How can you check to find out whether a stock is liquid until you get it? You may check the daily and average quantity.
Volume is the number of shares a stock transactions during the day. Daily volume will demonstrate the quantity of shares that have traded on that actual day.
It can be a lot easier to get shares than to sell them if a stock isn’t that liquid. This is crucial because if you purchase shares of stock which aren’t liquid and you will need to eliminate them because you will need the money or you want to purchase another stock, then the inventory’s illiquidity may make it tough to discover a buyer and you are stuck with them until someone buys them .
You’ll almost always have the ability to sell part of your position and might need to sell part of the shares daily and the rest another day. Or, perhaps you sell a few of the stocks in the morning and the remainder in the day. In any event, you will need to be certain that the stock you are purchasing is liquid enough to eliminate in the event you will need to.
Do note, this does not mean that stocks that are not that liquid aren’t great investments since they certainly are. If a stock has very low liquidity and does not trade that much throughout the day, but good news is out about the inventory bringing attention to it, then it will surely have more volume on that day. However, this is simply too tough to always predict.
As a guideline, I’d say if a stock averages more than 200,000 shares in bulk then it is liquid enough to purchase. Some have as little as just 1,000.
KEY TAKEAWAY: Be sure to perform a volume check and be sure that the stock you are buying is liquid enough if you will need to sell it shortly.
ACTION STEP: Go look up the quantity for any 3 shares using either Google Finance or Yahoo Finance.