Liquidity refers to the transaction value a share sees every trading day or week. The number is worked out by simply adding the value of all the trades for a given period. It is often then calculated as an average for the day too.
Why market liquidity is important
Liquidity is important when shares are very illiquid, in other words, when there are not many trades in the share. The problem is that, if a share is only trading some R1 000 per day on average and you wanted to buy, say, R5 000’s worth of the share, you would be a significant trader in the share. This could result in your transaction moving the share higher and you paying a higher price.
The other risk is that, should you want to sell, you could push the share lower by your selling action and you could receive a lower price.
Using liquidity management to buy and sell shares on the JSE
Ideally, you want to look only at buying shares that have an average daily liquidity of at least ten times the value you wish to buy.