What is a characteristic of stocks with high liquidity?

Stocks with high liquidity are characterized by narrow bid/ask spreads. Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. High liquidity typically means that there are many buyers and sellers actively trading the stock, which leads to a smaller difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept). A narrower bid/ask spread indicates that the market is efficient and active, allowing traders to enter and exit positions with minimal cost.

Conversely, stocks with slow trading volumes tend to have wider bid/ask spreads since fewer traders are participating in the market, which adds to the cost of trading. Being frequently shorted or having a low market capitalization does not define liquidity; instead, they can occur in both liquid and illiquid stocks and are influenced by different factors. High liquidity fundamentally leads to more efficient price discovery and lower transaction costs, which is why narrow bid/ask spreads are a key characteristic of these stocks.