Liquidity
Liquidity is how quickly and easily an asset can be converted to cash at a price close to its current value and without substantial cost.
🎬 Video Explanation
Exam Tip
Liquidity concerns how quickly and at what cost an asset can be converted to cash. Mutual fund shares are redeemed at the next calculated NAV. Retail ETF shares trade at market prices.
What is Liquidity?
Cash is already available to spend. An asset such as real estate may take longer to sell, and a seller who needs cash immediately may have to accept a lower price. Liquidity risk is the risk of being unable to sell when needed at a reasonable price.
Trading Liquidity
| Factor | What to look for |
|---|---|
| Trading volume | Frequent trading can indicate that buyers and sellers are easier to find |
| Bid-ask spread | A narrow spread usually means a lower cost to trade immediately |
| Market depth | Available orders at and near the current price help determine how much can trade before the price moves |
Liquidity can change with market conditions and the size of the order. A large order can move the price even when a small order would trade readily.
Liquidity of Funds
- Open-end mutual funds. Investors typically redeem shares with the fund at the next calculated net asset value (NAV), less any applicable fees. Money market funds also generally offer business-day redemption, and some redemptions can incur liquidity fees.
- Exchange-traded funds (ETFs). Retail investors typically sell on an exchange during trading hours at the market price. The bid-ask spread affects trading cost, and the market price can be above or below NAV.
Series 6 Exam Alert
When evaluating a customer's liquidity needs, ask when the customer needs cash and what a sale or redemption would cost. For mutual funds, look at redemption terms and the next calculated NAV. For ETFs, look at the available market price and spread.
Study This Term In
Course Playlist133 videosVideos125 videosBlogs33 blogs RadioThird-party resources · We may earn a commission from purchases.
Series 7 Study Guide 2025-2026: Complete Prep Book for the FINRA General Securities Representative Certification with 10 Full Length Practice Tests and 1500+ Questions & Detailed Answers.
By Solway, Marin K.
$29.99 · 
Flashcards on Mometrix
Practice exams on ExamEdge
Take courses on Udemy
Third-party resources · We may earn a commission from purchases.
Series 66 Study Guide 2025–2026: 10 Full-Length Practice Tests, 1600+ Realistic Questions, Detailed Answer Explanations, and Proven Strategies to Pass the Uniform Combined State Law Exam
By Bean, Charles K.
$29.99 ·
Practice exams on ExamEdgeFlashcards on Mometrix
Prep course on AchievableRelated Terms
Bid-Ask Spread
The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask), representing a transaction cost and liquidity indicator.
Market Order
A market order instructs a broker to buy or sell at the best available prices, generally promptly in normal market conditions. It does not guarantee the execution price, and trading halts or lack of liquidity can prevent execution.
Net Asset Value (NAV)
NAV is the per-share value of a mutual fund or ETF, calculated by dividing total assets minus liabilities by the number of outstanding shares.
Your AI study companion · 10 free interactions a day
Stay Updated
Get free exam tips and study guides delivered to your inbox.