Liquidity Analysis: Bid/Ask, Volume and Market Impact
What is liquidity analysis?
Liquidity analysis assesses how well a stock can be traded — without moving the price through your own order. An illiquid stock may show attractive signals and still be a poor trade because entering and exiting becomes expensive.
The 3 core indicators
Bid/Ask Spread
The spread is the difference between the highest buy offer (bid) and the lowest sell offer (ask).
| Spread | Interpretation |
|---|---|
| < 0.1 % | Highly liquid — top stocks (AAPL, TSLA, SPY) |
| 0.1 – 0.5 % | Normal — mid-cap stocks |
| 0.5 – 2 % | Illiquid — elevated trading costs |
| > 2 % | Very illiquid — entry only with limit orders |
Every trade costs at least half the spread — in illiquid stocks this adds up quickly.
Trading volume
Volume is the number of shares traded per day. High volume means many buyers and sellers, fair price discovery.
| Average daily volume | Assessment |
|---|---|
| > 10M shares | Highly liquid |
| 1M – 10M | Liquid |
| 100k – 1M | Limited liquidity |
| < 100k | Illiquid — caution |
Market impact
Market impact describes how much an order moves the price. With large positions in illiquid stocks, you literally buy yourself more expensive.
- Large position in illiquid stock → Price rises on buy, falls on sell
- Candidates from the selection universe are often illiquid small-caps → Pump-and-dump risk elevated
How 360° evaluates liquidity
Spread score + volume score + market impact score
→ Liquidity rating: High / Medium / Low
Low rating → Short bias (elevated execution risk)
Medium rating → Neutral
High rating → No penalty
Stocks with very low liquidity scores are flagged with a warning symbol in the report — regardless of the overall signal.
Limitations of liquidity analysis
- Liquidity can change instantly — sudden community momentum can double volume overnight
- Pre-market trading often has very wide spreads — not representative of the main session
- Dark-pool trading is not visible in public volume data
- Options on illiquid stocks have even higher effective spreads
All 8 methods → | Market regime → | News sentiment → | Pricing →