Market Liquidity Explained, Four Billion Dollars?

Posted by Blain Reinkensmeyer
April 26, 2007 at 11:18 am

Liquidity is one of THE most important factors in the eyes of online stock brokers. If I want to buy 100 shares of Apple (AAPL) stock, then I should be able to get my shares at that second right? I shouldn’t have to wait 15 minutes in line to get my order placed. That makes sense, so have you ever contemplated just HOW liquid the stock market actually is? You think our $1000 of Apple stock is a lot? How about $10000, $100000, $1 million, $10 million? Guess again, try $4 Billion… in one day. Let’s explore shall we?

Liquidity Broken Down

As usual, let’s see what investopedia has to say about liquidity, and I will break it down for us:

1. The degree to which an asset or security
can be bought or sold in the market without affecting the asset’s
price. Liquidity is characterized by a high level of trading activity.

2. The ability to convert an assetto cash quickly.Ã‚Â Also known as “marketability”.

This goes back to us standing in line to get what we want. In the stock market, liquidity is extremely important because everything moves so fast, we can’t afford to wait even 5 minutes in line! Have you ever seen online brokers advertising a, “5 second guarantee”? They guarantee to have any market order filled within 5 seconds, or the order is on the house. Even 5 seconds though can be a long time.

$4 Billion Dollars and Liquidity

Repeating the second part of the first pointer, “…without affecting the asset’s price” So what this means is that I should be able to go place an orderfor $10,000 of Apple and not affect the price of the stock. If it is trading at $90 a share, then the stock should move only pennies for me to gain my position. This is really a whole second topic which I will explain down the road, but what you want to take out of this is simply the fact that, “hey when I go to buy my shares, I shouldn’t move the stock price barely at all”

The bigger the company (size is determined by what is known as market capitalization), you can almost assume the more liquidity the stock is going to have. The best way to explain this is by comparing a big company and a small company. Let’s compare Apple (APPL) and a made up “Joes Shack” stock. Let’s say that Joe’s shack is a tiny company worth $1 million dollars, and as of today Apple is worth more than $85 billion. So, if we went and bought $10,000 of stock in both Joe’s Shack and Apple, which stock do you think will have the better liquidity to get our shares NOW and without moving the stock price?

The answer is Apple, because the company is HUGE! $10,000 into a $85 Billion dollar company is nothing compared to $10,000 into a $1 million dollar company.

To finish this post I want to leave you with a staggering number that really puts this all into perspective. Just yesterday Apple traded 43,337,000 shares at around an average price of $94.75. This means that over 43 million shares were traded… at around $94.75 EACH. If you do the math and multiple the two together you will get $4,106,180,750. What is that exactly? 4 billion, 106 million, 180 thousand, 750 dollars. Stunned yet? You should be, because that is how much MONEY went through Apple stock in ONE DAY!!! And you thought your $1 million dollar retirement account was big, think again.

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