Liquidity
The ease and speed with which a stock can be bought or sold without significantly affecting its market price
- Large Cap Companies typically have higher trading volumes and narrow bid-ask spreads, often differing by only a few cents. As a result, they are generally considered highly liquid
- Small Cap Companies often have lower trading volumes and wider bid-ask spreads, making them relatively illiquid compared to larger, more actively traded companies
Example of Liquidity Risk:
You own shares of a small-cap company that is thinly traded and relatively illiquid. You want to sell your shares.
The key question is: "How much is a buyer willing to pay?” If the bid price is extremely low, and you are unwilling to accept it, you may be forced to continue holding the stock until another buyer is willing to pay a higher price. This becomes problematic if you need access to the funds.