Dollar Volume Liquidity

What Is Dollar Volume Liquidity?

Dollar volume liquidity alludes to a stock's or exchange-traded fund's (ETF) share price times its daily volume. Dollar volume liquidity is important to institutional investors since they make such large trades.

At the point when a stock is highly liquid, it is more straightforward to enter and exit positions while lessly affecting the stock's price.

Figuring out Dollar Volume Liquidity

At the point when there is a high level of investor interest in a stock or ETF, and it is traded on a major exchange, it will quite often be highly liquid. High dollar volume liquidity is generally a positive sign, meaning there is huge interest in the stock. In any case, a few investors that utilize specific strategies, for example, attempting to get into a stock before it becomes well known, could favor stocks with low dollar volume liquidity. A stock can likewise have high dollar volume while it is falling in value, predominantly in light of the fact that falling prices can result in panic selling which drives up the volume.

One more perspective on simplicity of buying and selling a stock is share volume, or volume, which is the number of shares traded in a day.

Share [volume](/volume, for example, knowing that a stock trades 1,000,000 shares each day, is important however doesn't recount the whole story. Assuming the stock is just $1, that means just about $1 million worth of stock (dollar volume liquidity) is trading hands every day. On the off chance that an institutional investor needs to track down a place to send $100 million, this may not be great for them.

Then again, a $200 stock that does 1,000,000 shares means there is $200 million of stock changing hands every day. In a stock like this, it is a lot more straightforward for the investor to buy or sell the $100 million worth of stock that they need to execute.

Special Considerations

Stocks with high liquidity, especially volume, will more often than not have tighter bid-ask spreads. This diminishes the costs associated with trading. High dollar volume liquidity likewise will in general lead to reduced spreads, however now and again, it may not. A stock might have a $3,000 price tag and trade 50,000 shares each day. That is a $150 million in dollar volume liquidity, yet on the grounds that there aren't many shares evolving hands (relative to high volume stocks which do at least 1,000,000) the bid-ask spread might in any case be very large.

Generally talking, investors that place large wagers on individual stocks or ETFs will do as such in those that have large dollar volume liquidity, since, in such a case that sentiment changes they need to have the option to exit the position as close to market value as could really be expected. Attempting to enter or exit a large position in a low dollar volume stock could bring about the order moving the price substantially, something the investor doesn't need. Large orders in low-volume stocks will quite often result in slippage.

The concept of dollar volume liquidity and investor interest relates to other financial markets too. For instance, in the currency market the most traded currencies, and ones that investors bet on the most, are the [U.S. dollar](/usd-US dollar), the euro, and the Japanese yen. They are liquid currencies and have a high trading volume.

Instances of Dollar Volume Liquidity in Several Different Stocks

A low-priced stock can do extremely high volume bringing about high dollar liquidity. A high-priced stock can do low volume, bringing about low dollar liquidity. Consequently, traders might take a gander at both volume and dollar volume to survey the engaging quality of a stock.

Accept Citigroup Inc. (C) trades at $66.25 and has an average volume of 13 million shares each day. That is a dollar volume of $861.25 million. As a result of the high volume and high dollar volume, the stock has a one-penny spread and is alluring in view of its liquidity.
Apple Inc. (AAPL) is even more appealing for its liquidity. Accept it trades at $200 and its daily average volume is 27 million. The dollar volume liquidity is $5.4 billion. In spite of the higher price, the spread is still tight and the high volume and dollar volume make it alluring according to a liquidity viewpoint.
Expect that Berkshire Hathaway Inc. (BRK.A) is trading at $302,000 per share. It averages 270 shares each day. The dollar volume is $81.54 million. The high price tag of the stock reduces turnover and volume. This can mean large spreads and a more drawn out amount of chance to collect or dump a large position.
Accept that Chesapeake Energy (CHK) trades at $1.40 and averages 50 million shares. The dollar volume is $70 million.

To an institutional investor, BRK.A, AAPL, and C might be more alluring than CHK since they have higher dollar volumes. To a retail trader, CHK, C, and AAPL are preferred over BRK.A. This is predominantly due to the high price of BRK.A and the low volume which expands the spread.

Retail traders are more worried about volume, while institutional traders will think about both volume and dollar volume liquidity.

Highlights

Dollar volume liquidity is a stock's share price duplicated by its daily share volume.
High dollar liquidity makes it more straightforward for institutional traders to buy or sell in large dollar amounts without moving the price substantially.
High dollar volume will in general diminish the bid-ask spread, however this likewise relies upon share volume, since high volume greaterly affects the spread.