Liquidity can be hard to explain with respect to stocks, but an easy way to start thinking about liquidity is by picturing a water bottle with one of two things in it, water or concrete. If you took a water bottle with concrete in it, twisted off the cap and flipped it upside down, nothing would pour out right? That is correct, because concrete in this case is an “illiquid” item, meaning the concrete can’t easily get out of the bottle. If we took a bottle with water in it, twisted off the cap and flipped it upside down, the water would easily pour out of the bottle. In this case, water is a “liquid” item (not the main definition liquid that we are used to using), because it can easily get out of the bottle. We can take the same concept of water and concrete liquidity into assets and stocks. Do you know how much easily accessible money you have in the form of cash? This is a measure of your liquidity. Liquidity is the term used to describe how easy it is to convert assets to cash. The most liquid asset, and what everything else is compared to, is cash. This is because it can always be used easily and immediately. Stock (asset) liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Stocks that can be easily bought or sold are known as liquid assets. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get their money out of the investment. Stocks that trade in larger volume tend to be more liquid because it is easier to find buyers and sellers to get out of your position. Volume is the number of contracts or shares traded in a security or an entire market during a given period of time. For example, Apple is a very liquid stock due to the amount of people that trade in and out of it. Apple trades an average of 15.5 million shares a day. There are stocks called “penny stocks” that have very low prices and usually very low volume (liquidity). These stocks are a major risk to invest in because it is not easy to get out of the market once you are in it. Liquidity is something that you want with the stocks that you invest in.