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. 

 

RELATED TERMS
  1. Liquid Market

    A liquid market is one where there are many bids and offers and ...
  2. Liquidator

    A liquidator is a person or entity that liquidates something, ...
  3. Liquidate

    Liquidate means to convert assets into cash or cash equivalents ...
  4. Volume

    The number of shares or contracts traded in a security or an ...
  5. Volume Analysis

    Volume analysis is the examination of the number of shares or ...
  6. Overall Liquidity Ratio

    Overall liquidity ratio is the measurement of a company’s capacity ...
Related Articles
  1. Trading

    Interpreting Volume for the Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume.
  2. Investing

    Is a Stock's Trade Volume Important?

    Stock volume is easy to calculate but understanding its importance is a little more involved. Take the time because it's a worthwhile investing tool.
  3. Trading

    A Guide To Finding The Most Actively Traded Stocks

    Knowing the trading volume of a stock helps traders understand price movements and forecast future movements. This short guide helps investors locate actively traded data.
  4. Investing

    How To Choose Stocks For Day Trading

    Day trading entails trading a stock several times over a day in an effort to profit on its price movements. It’s a risky strategy, but can pay big returns.
  5. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  6. Financial Advisor

    Why Liquidity Matters in the Corporate Bond Market

    Professional analysis and constant monitoring of liquidity risk when investing in corporate bonds is highly important.
  7. Tech

    How To Pick The Best ETF

    Of the hundreds of exchange-traded funds on the market, some are bound to fail. Learn how to pick the best of the bunch.
  8. Trading

    Options trading volume and open interest

    Learn how trading volume and open interest can give you an edge when trading options.
RELATED FAQS
  1. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ... Read Answer >>
  2. Differences between liquidity and liquid assets

    Liquid assets can easily be converted into cash. Liquidity is the ability of a business to pay its debts using its liquid ... Read Answer >>
  3. What number of shares determines adequate liquidity for a stock?

    Learn how the liquidity of a company's shares is generally affected by bid-ask spread and trading volume of shares bought ... Read Answer >>
  4. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
  5. Is it important for a company always to have a high liquidity ratio?

    Understand the significance of the liquidity ratio and how it is used in conjunction with other measures to arrive at an ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center