A liquid stock has enough trading volume, buyers and sellers, that a transaction will be executed quickly and efficiently at the bid or ask price. Liquid stock prices are minimally affected by smaller trade sizes.
The simplest definition of a liquid stock is that you can easily buy or sell it fast for cash. Another definition is a stock you can always sell fast for close to market price.
A liquid stock has liquidity; liquidity means enough volume to execute trades. Volume is the number of shares traded per day. Liquidity is the ability to convert an asset into cash fast. Some popular assets, such as cryptocurrencies and gold, are not liquid because you cannot sell them for cash fast.
A security or investment is illiquid when there are not enough buyers and sellers to transact the trade quickly at the current market price. Typical illiquid equities are penny stocks traded on over-the-counter markets.
A good example of illiquid security is gold. If you take gold to the pawnshop or gold exchange to convert it to cash, the dealer will typically pay far less than the market rate.
Cryptocurrencies are also illiquid assets because you have a limited number of exchanges to convert many cryptocurrencies to fiat currency, such as US dollars. The exchanges and crypto wallets, and apps all take a commission that erodes liquidity.
Are Stocks Liquid Assets?
High-quality blue-chip stocks, such as Apple and AMD, can be considered liquid assets. A stock is only a liquid asset if there is a high and constant demand for it in the market.
However, stocks can suddenly become illiquid if trading is halted on an exchange due to a market crisis.
Stock ETFs normally considered liquid can become illiquid if trading is halted, as in the case of the March 22nd trading halt on the VanEck Russia ETF, due to the Russia Ukraine conflict.
Today, you can sell liquid stocks fast through online brokerages and stock apps. Many investors use stocks as liquid assets. People use stocks as liquid assets because they often deliver a higher return than savings accounts, bonds, certificates of deposit (CDs), bonds, and other popular cash investments.
20 Most Liquid Stocks in the USA
The most liquid stocks in the USA are AMD, Apple, Ford, NIO, AT&T, and NVIDIA, each with over 50,000 transactions per day over the previous three months.
Here is a list of the 20 most liquid stocks in the USA.
|AMD||Advanced Micro Devices||105,471,928||$88.73|
|BAC||Bank of America||52,263,768||$35.76|
|ITUB||Itau Unibanco Holding||48,143,792||$4.51|
|AAL||American Airlines Group||42,088,080||$16.57|
|BABA||Alibaba Group Holding||32,461,024||$84.57|
*Liquidity is the average daily volume of stocks traded over three months. Data provided by Stock Rover.
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How to Find Liquid Stocks.
You can easily find the most liquid stocks by using stock analysis software. Select an exchange, and sort the stock list by 3-month average trading volume. Those companies at the top of the list are the most liquid.
Is Stock a Liquid Asset?
Liquid stocks are not as liquid as cash because there is no guarantee stock will remain liquid. The market can be volatile, causing a stock to lose value.
Many people believe some stocks are liquid. Some investors regard popular stocks, such as Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG), as liquid because there is a high demand for them.
Others regard stocks in cash-rich companies such as Amazon, Goldman Sachs, and Bank of America as liquid stocks. Warren Buffett buys finance and banking stocks, such as Bank of America, US Bancorp, and BNYMellon, because those companies accumulate enormous amounts of cash.
Are Stocks Considered Liquid Assets?
A stock can be a liquid asset if it has market liquidity or accounting liquidity. Market liquidity means that a stock has a high cash value because of its strong demand.
Amazon (AMZN) has market liquidity because it has a popular stock and a large market capitalization. Amazon shares were trading at $2,332.39 and a $1.187 trillion trillion market cap on May 5, 2022.
Accounting liquidity refers to a company’s book value and listed assets. A company with enormous amounts of assets, or cash and short-term investments, has accounting liquidity.
Buffett buys stocks with high accounting liquidity because they will have value the market cannot affect. Apple can retain the cash and assets no matter what price its stock trades at.
Do Brokers Consider Stocks as Liquid?
Margin accounts and margin trading prove stocks can be liquid assets. In a margin account, a brokerage, platform, or investment bank uses the cash value of stocks as collateral.
The lender extends a trader a line of credit they call margin. In exchange, the lender gets the right to sell the stocks if the borrower does not pay the margin. Margin accounts convert stock liquidity into credit.
Margin accounts show banks and brokerages consider stocks liquid assets. Without stock liquidity and margin accounts, stock markets could not function.
Not all stocks are considered liquid assets. Most brokerages will not sell over-the-counter and penny stocks because those issues are not liquid. Penny stocks are cheap shares that sell for under $1 on the over-the-counter (OTC) markets.
Most penny stocks are not liquid because they trade in unregulated markets where companies do not have to reveal financial information. Margin accounts do not trade penny stocks because there can be no way to ascertain the stocks’ true value.
Are Stocks more Liquid than Bonds?
Bonds and treasuries are considered more liquid than stocks because their value and stability are guaranteed by the issuer, usually a central bank or company.
Bonds rated AAA or Aaa by the big three rating agencies are believed to have a low risk of default. That means it is easy to sell those bonds for cash or borrow against them. AAA corporate bonds and government bonds such as US treasury bonds are highly liquid.
The bond market has enormous liquidity that is easy to access. The CFA Institute estimates US businesses issue $1 trillion worth of corporate bonds each year.
Unlike stocks, bonds can be issued to create liquidity; many companies issue bonds to finance operations. Fourth, governments can issue bonds. Some investors consider government bonds safe because a government can always raise taxes or print money to cover bonds.
Although bonds are considered more liquid than stocks, stock liquidity is still an important source of financing investors can tap.
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