Liquidity in the Stock Market

When trading about the stock market, most people don’t think about the liquidity. Trading is performed as if liquidity is infinite and our own trading won’t influence the overall market. Unfortunately, this is not a true assumption. The following table shows the average dollar-amount of shares exchanged in a single trading session:

1AAPLApple Inc.$6,123M
2BRK.ABerkshire Hathaway Inc.$6,122M
3BACBank of America Corp.$2,251M
4GOOGGoolge Inc.$1,844M
5CCitigroup, Inc$1,794M
6MSFTMicrosoft Corp.$1,671
7XOMExxon Mobil Corp.$1,537
8JPMJPMorgan Chase & Co.$1,422
9INTCIntel Corp.$1,363 Inc.$1,164
20CATCaterpillar Inc.$870M
50OXYOccidental Petroleum Corp.$440M

As we can see, once we get down the rank 50, liquidity is actually surprisingly small. Assume that half of the value is traded in the first and last hours of the session. That now leaves us $220M. Placing an order of $1M in that environment will actually matter: We have to expect quite a bit of slippage, making our real trading performance deviate significantly from the backtested (and expected) performance.

A few takeaways:

  • stick to the liquid stocks: the S&P and Nasdaq top 100 stocks are probably a decent choice
  • diversify
  • expect significant slippage

One possible implication is, to have a closer look at Forex trading. The liquidiy when trading currencies is huge compared to the stock market.

© Felix Bertram 2002-2015. Last update September 2016.