Importance of Stock Liquidity

If we look at the company CVG.TO, the last traded price is $33.33.  Furthermore, with the level 2 trading view, we can clearly see who are the buyers and sellers and their limit order bid and asking price.

The spread, difference between the bid of $33.12 and ask of $33.60, is quite large.  Therefore, this is a stock that may become difficult to sell in the future for a decent price.  If you want a stock that should be easily to sell in the future, look for large, high volume, lots of shares traded, stocks.  As you move towards low volume, few shares traded, the risk increases.  Of course, higher risk = higher reward.  Unfortunately, there is no guarantee that a company that has high volume will stay that way in the future.  Furthermore, there can be high volume as the stock price plummets or flies high.

For the stock CVG.TO, if you want to sell 480 shares with a market order, you will sell 200 shares to the highest bidder for $33.12 then another 80 for $33.11 then another 200 for $33.10.  Therefore, the last traded price will be … $33.10.

If you want to buy 260 shares with a market order, you will buy 100 shares at $33.60 then 100 shares at $33.61 then 30 shares at $33.62 then 30 shares at $33.63.  Therefore, the last traded price will be … $33.63.

As you will see from the examples above, when you buy or sell CVG.TO with a market order, you will not get the last traded price.  You will get the price that the bidder or seller is demanding.

Leave a Reply