Financial Liquidity

To avoid losing money in short investments, choose highly liquid stocks

Liquidity in the financial markets refers to how easily a given financial instrument can be sold, and is a reflection of the number(s) of people involved in buying and selling the instrument.

When many people are buying and selling a stock, we say that there is much liquidity. When only a few people are buying and selling, there is low liquidity.

The more liquid the stock is, the ‘tighter’ the bid-ask spread. Purchasing highly liquid stocks minimizes the loss when stocks are sold immediately after purchasing. The bid-ask spread represents the minimum we must make not to lose money.

And, the wider the bid-ask spread, the more lost immediately after purchase.

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