Liquidity: why some things cost more to trade

Measure liquidity as the spread in percent and the depth on the book before trading anything small, new or after hours. Free lesson 13 of 13 in Tickfloor's course, no card needed.

What the spread costs you

The spread is the gap between the bid and the ask. It is the cost you pay just to trade, before the price has moved at all. A dollar spread that sounds tiny can cost you a lot, or almost nothing, depending on the price of the thing you are trading.

Think of a money exchange booth at the airport. It buys your foreign cash for less than it sells it. That gap is how it makes money. You pay the spread whether the price moves your way or not. It is real money gone.

The spread as a percent of the price is the number that matters. One cent on a A$50 share is A$0.01 ÷ A$50 = 0.0002 = 0.02%. Half a cent on a A$0.10 share is A$0.005 ÷ A$0.10 = 0.05 = 5%. Same idea, completely different costs. The second one is 250 times more expensive as a percent.

General information only. It doesn't consider your objectives, finances or needs.

Open the full interactive lesson (16 minutes), or see the whole free course.

More free lessons: What is trading?, Market, limit and stop orders, in plain English, What you can trade, and how.