How Liquidity Impacts the Attractiveness of an Asset

by Charles Rotblut, CFA

How Liquidity Impacts The Attractiveness Of An Asset Splash image

Liquidity refers to how easy or hard it is to exchange an asset at an identifiable market price. Greater levels of liquidity improve pricing and reduce transaction costs by attracting a large number of potential buyers and sellers. Lower levels of liquidity worsen pricing and increase transaction prices, deterring potential investors.

Liquidity Components

There are four key components to measuring an asset’s liquidity: the size of the market, the number of transactions, the transparency of pricing and whether or not there are restrictions to buying and selling.

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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at


C Robinson from Virginia posted about 1 year ago:

If there are too few shares on the market, there is poor liquidity, so the number of shares issued by the company is a liquidity factor.
Share classes with restrictions such as sale approval contingencies or voting rights restrictions reduce liquidity.
Limited partnerships lacking a market maker tend to have poor liquidity.
Since many individual investors tend to trade from $500 to $10,000 per transactions, share prices in the thousands acts as an investor filter and may affect liquidity. Many companies address this with stock splits to bring share price down to attract more investors.

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