Liquidity of Stock is a Relative Term Depending on Relative Value of Selling Price and Last Trade

Abstract

Conventional notion posits that stock is a semi-liquid asset. And this is clearly visible on stock exchange during a bear market when the prices of many stocks are declining. In this situation, it is hard to sell a stock at an elevated value beyond market expectations. Hence, this abstract proposes that the liquidity of stock is a relative term. Specifically, if the selling price of the stock is within 2 to 3% of the price of the last transaction in the stock market, it is likely to be more liquid, and the transaction is more likely to go through. On the other hand, if the proposed selling price of the stock is about 5 to 8% above market value, then it is difficult to sell the stock, and thus, the stock is not liquid in this case as it is difficult to convert the stock value into cash. Overall, stock does possess the characteristics of a price dependent liquidity effect, where selling prices close to market value is known to be more liquid. This effect has important implications for the functioning of stock exchanges where it serves to constraint the gyration of stock prices during normal trading. However, in the event of panic selling such as in a financial crisis where many stockholders sell at last done price, the high liquidity of stock can serve as a positive feedback loop to further amplify the downward cascade of the stock price.

Keywords: liquidity of stock, selling price, stock exchanges, semi-liquid asset, positive feedback loop, micro-economic, macro-economic, auction theory