DEFINITION of Dollar Volume Liquidity
Dollar volume liquidity refers to a stock or exchange-traded fund's share price times its average volume. Dollar volume liquidity is important to institutional investors because they make such large trades. When a stock is highly liquid, it is easy to enter and exit positions and easy to buy and sell without influencing the stock's price.
BREAKING DOWN Dollar Volume Liquidity
When there is a high level of investor interest in a stock or ETF , and it is traded on a major exchange, it will tend to be highly liquid. High dollar volume liquidity is generally a positive sign, meaning there is significant interest in the stock. However, some investors that employ certain strategies, such as trying to get into a stock before it becomes popular, might prefer stocks with low dollar volume liquidity. Another way of looking at the ease of buying and selling a stock is share volume liquidity, which is the number of shares traded in a day.
Example: Share price of Apple is $180, and the average daily trading volume is 250,000 shares, then the dollar volume liquidity = 45,000,000 USD.
Because of this high liquidity, there will also be a very small bid-ask spread. Dollar volume liquidity is also important to small cap investors because small company stocks may not have the same liquidity that investors can take for granted with a large-cap stock.
Generally speaking, investors that place large bets on individual stocks or ETFs will do so with those that have large dollar volume liquidity, because if sentiment changes they want to be able to exit the position as close to market value as possible.
The principle of dollar volume liquidity and investor interest pertains to other financial markets. For example, in the currency market the most traded currencies, and ones that investors bet on the most are the U.S. dollar, the euro and the Japanese yen that all are very liquid and have a high trading volume.