What Is Liquidity and Volume?
What is Liquidity and Volume is a crucial concept. Every beginner should understand it before entering the stock market. Whether you trade stocks, commodities, or cryptocurrencies, liquidity and trading volume directly affect your buying, selling, and overall profitability.
Simply put:
- Liquidity = How quickly you can buy or sell a stock.
- Volume = How many shares are being traded in the market.
Understanding these two terms will help you avoid losses, enter trades smoothly, and choose better stocks.
What Is Liquidity in the Stock Market?
Liquidity in the stock market refers to how quickly you can buy or sell a stock. It indicates how easily this can be done without affecting its price too much. A stock with high liquidity has plenty of active buyers and sellers. This allows your orders to execute instantly at prices close to what you expect. On the other hand, low-liquidity stocks move slowly. They have wide bid-ask spreads. This may cause slippage, which means you end up paying more or selling for less than planned. In simple terms, high liquidity means smoother trades, lower risk, and better control over your entry and exit points.
Liquidity means:
How easily a stock can be bought or sold without changing its price too much.
If a stock has high liquidity, you can enter or exit quickly.
If a stock has low liquidity, your order may take time to fill.
✔ Characteristics of a highly liquid stock:
- Tight bid-ask spread
- Quick order execution
- Low price slippage
- High participation (buyers & sellers)
✔ Characteristics of a low-liquidity stock:
- Wide bid-ask spread
- Slow order execution
- High price slippage
- Fewer buyers/sellers
Why Liquidity Matters for Beginners?
Liquidity matters for beginners because it directly affects how smoothly and safely you can trade in the stock market. When a stock is highly liquid, your buy and sell orders are executed instantly. The transactions occur at fair prices. This helps you avoid unnecessary losses. But low-liquidity stocks can trap beginners—orders take longer to fill, prices fluctuate unexpectedly, and slippage becomes a real risk. This means even a good trade idea can turn bad. This happens simply because there weren’t enough buyers or sellers. For beginners still learning the basics, choosing highly liquid stocks is important. It ensures easier execution. It also lowers risk and provides a much more predictable trading experience.
If liquidity is low, you can lose money even if you picked the right stock.
✔ How?
Because low liquidity causes:
- Slippage (you buy at a higher price than expected)
- Delayed order execution
- Difficulty exiting during a crash
This is why professional traders always check liquidity before entering any position.
What Is Trading Volume?
Trading Volume is:
Total number of shares traded within a specific time (1 minute, 1 hour, 1 day, etc.).
Example:
If 50 lakh shares of TCS were traded today, the day’s volume = 50,00,000.
High volume means:
- More activity
- More participation
- Strong trend formation
Low volume means:
- Weak movement
- Uncertain trend
- Fewer buyers & sellers
Liquidity vs Volume: Simple Comparison Table
| Feature | Liquidity | Volume |
|---|---|---|
| Meaning | Ease of buying/selling | Number of shares traded |
| Focus | Market depth | Market activity |
| Indicator | Bid-ask spread | Volume bars on charts |
| Effect | Affects slippage | Affects trend strength |
| Example | Blue-chip stocks | News-based trading spikes |
How Liquidity and Volume Affect Stock Prices
Liquidity and volume play a major role in how a stock moves in the market. When a stock has high liquidity, buy and sell orders get matched quickly. This keeps the price stable and reduces sudden spikes or drops. High trading volume shows strong market participation. It often leads to clear trends—either upward or downward. Many traders are influencing the price together. On the other hand, low liquidity or low volume can cause unpredictable price movements, wider bid-ask spreads, and higher slippage. This means even small buy or sell orders can push the price sharply in one direction. In short, liquidity ensures smooth price movement, while volume shows strength behind that movement. “What Is Liquidity and Volume?”
✔ High Liquidity + High Volume
➡ Smooth price movement
➡ Reliable trend
➡ Easy entries & exits
✔ Low Liquidity + High Volume
➡ Volatile moves
➡ Pump & dump risk
✔ High Liquidity + Low Volume
➡ Stable but slow movement
✔ Low Liquidity + Low Volume
➡ Avoid – risky for beginners
High Liquidity vs Low Liquidity Stocks
High-liquidity stocks trade actively throughout the day. This allows buyers and sellers to enter or exit positions instantly. The trades occur with minimal price difference. These stocks—usually large-cap or widely followed companies—have tight bid-ask spreads and stable price movements, making them ideal for beginners. In contrast, low-liquidity stocks often have fewer participants. Orders take longer to execute. Even small trades can cause big price swings. Such stocks typically come with wide bid-ask spreads, higher slippage, and greater risk. For new investors, choosing high-liquidity stocks ensures smoother trading, better price stability, and a safer learning experience. “What Is Liquidity and Volume?”
High Liquidity Stocks (Examples):
- Reliance
- HDFC Bank
- Infosys
- TCS
- ICICI Bank
Low Liquidity Stocks (Examples):
- Small micro-cap companies
- Penny stocks
- Suspended/rarely traded stocks
🛑 Beginners should avoid low liquidity stocks.
High Volume vs Low Volume Stocks
High-volume stocks are actively traded throughout the day, showing strong participation from both buyers and sellers. This high activity often leads to more reliable price movements, clear trends, and quicker order execution. Traders prefer high-volume stocks because the market interest behind them reduces uncertainty and provides better confirmation of price breakouts. On the other hand, low-volume stocks trade infrequently. Their price movements are weaker and less predictable. They are more prone to sudden spikes caused by even small orders. For beginners, sticking to high-volume stocks is safer. Low-volume stocks can easily lead to false signals. They often exhibit poor trend strength. It’s difficult to enter or exit positions with them. “What Is Liquidity and Volume?”
High Volume Stocks: What Is Liquidity and Volume?
- News-driven stocks
- Result announcement day
- Trending sectors (IT, PSU, Pharma, etc.)
Low Volume Stocks: What Is Liquidity and Volume?
- Unpopular companies
- Weak fundamental businesses
- Stocks with limited public interest
How Beginners Should Use Liquidity & Volume
Beginners should use liquidity and volume as basic filters before entering any trade to reduce risk and improve accuracy. Always check whether a stock has enough daily trading volume so your orders can execute smoothly without major price changes. Avoid stocks with wide bid-ask spreads or low liquidity, as they often cause slippage and unexpected losses. Use indicators like VWAP with Volume to identify strong trends and confirm momentum before buying. As a beginner, it’s safest to stick to highly liquid stocks like Nifty 50 or large-cap companies. In these, buying and selling is quick. It is also stable and predictable.
✔ Always check volume before taking a trade
Use TradingView/NSE chart volume bars.
✔ Avoid stocks with too much slippage
Wide bid-ask spreads = danger.
✔ Use VWAP + Volume together
VWAP is powerful for intraday traders.
✔ Prefer Nifty 50 & large cap stocks for learning
Safe, liquid, and beginner-friendly.
Real Market Examples (Simple)
Example 1: High Liquidity
You place a buy order for Infosys.
It gets executed instantly with minimum price difference.
Example 2: Low Liquidity
You place a buy order for a penny stock.
Your order remains pending OR gets filled at a much higher price → loss.
Example 3: High Volume Spike
A company reports strong Q4 results.
Volume rises suddenly and price shoots up → strong trend.
Common Mistakes Beginners Make
Many beginners enter the stock market with excitement but make avoidable mistakes that lead to losses. The most common errors include trading low-volume or low-liquidity stocks, which often causes delayed order execution and unexpected slippage. New traders make the mistake of relying too much on tips. They often ignore proper research. Additionally, they buy stocks purely based on price movement without understanding market behavior. Another major mistake is entering trades without checking volume trends, leading to false breakouts and weak momentum trades. By avoiding these simple mistakes and focusing on liquidity, volume, and proper analysis, beginners can trade more safely and confidently. (What Is Liquidity and Volume? )
❌ Trading low-volume stocks
❌ Ignoring bid-ask spread
❌ Entering trades during low liquidity hours (9:15–9:30 & 3:00–3:30)
❌ Not tracking volume breakouts
❌ Relying only on price without checking volume
FAQs | What Is Liquidity and Volume?
1. What is the best volume indicator for beginners?
Volume bars + VWAP is the simplest and most effective combination.
2. What is a good liquidity level?
Stocks with tight spreads and high average daily volume above 5–10 lakh shares are ideal.
3. Can I trade low-volume stocks?
It is risky. Avoid as a beginner.
4. Does high volume mean price will rise?
Not always. High volume shows interest—not direction.
5. Which is more important—liquidity or volume?
Both are important. Liquidity helps you enter/exit, volume confirms trend strength.
Final Words | What Is Liquidity and Volume?
Understanding What is Liquidity and Volume will make your stock market journey more confident, safer, and profitable. These two simple indicators decide whether you can trade smoothly, avoid slippage, and identify strong trends.
Understanding what is liquidity and volume is essential for anyone entering the stock market. These two simple yet powerful indicators help you judge whether a stock is safe, active, and suitable for your trading or investing style. High liquidity gives you smooth entries and exits, while strong volume confirms trends and market participation. When used together, they reduce risk, improve decision-making, and guide you toward smarter trades. As a beginner, focus on liquid and high-volume stocks to build confidence and avoid unnecessary losses.
