In financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value or current market value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount.
Now let’s apply these concepts to the stock market. A stock is considered liquid when its shares can be bought—and sold—quickly with minimal impact on its market price. Large-cap companies traded on the major exchanges are considered to be liquid: They are traded in high volumes, and so the price per share a buyer makes (which is known as the bid) is very close to the price a seller will accept (known as the ask).
Smaller-cap companies, which are traded on smaller exchanges more infrequently than larger-cap companies, usually have higher liquidity risk. That means that the price per share a buyer offers could be very different than the price a seller will accept. This is known as a greater spread. When these kinds of stocks witness a surge in demand, they can also experience a lot of volatility...
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