Booyah Breakdown: Liquidity

That's because the bid/ask spread will be bigger. That's the difference between the price at which you want to sell your shares and the price someone else wants to pay for them. Remember, the stock market is made of up buyers and sellers. It takes two to tango and you need each other to keep the trades flowing.

Let's go back to your Ferrari for a bit. Exotic car owners know it takes time and considerable negotiation to sell such a masterpiece. And not everyone is willing or able to plunk down a couple hundred thousand dollars for a car.

So let's presume you want to sell the car and you list it for $225,000. All these people show up just to see it, test-drive it and waste your time without buying it. Finally you get an offer for $190,000. That means your potential buyer just "bid" $190,000 against your $225,000 asking price.

That means the bid /ask spread is 15.5% ($225,000-$190,000/$225,000). In other words, the bid price is 15.5% off the asking.

That's a pretty big spread. Now, if you tried to sell that car down on Wall Street right after Goldman Sachs gave out bonuses, you probably would've gotten your asking price in cash, as those folks were on their way to lunch. In that case, the bid/ask spread would've been zero.

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