Stock Jobs Stock Market Liquidity 2 — Questions and Answers
Question 1: A stock that can be bought or sold quickly with minimal price impact is best described as having what characteristic?
- High liquidity (Correct answer)
- High volatility
- Low capitalization
- High dividend yield
Correct answer: High liquidity
High liquidity means assets can be traded fast without moving the price much.
Question 2: Which measure most directly reflects the cost of immediately trading a stock?
- Bid-ask spread (Correct answer)
- Price-to-earnings ratio
- Dividend payout ratio
- Beta coefficient
Correct answer: Bid-ask spread
A narrower bid-ask spread signals lower transaction cost and greater liquidity.
Question 3: A market maker on a stock exchange primarily improves liquidity by doing what?
- Continuously quoting both buy and sell prices (Correct answer)
- Banning short selling
- Setting the company's dividend
- Auditing the company's books
Correct answer: Continuously quoting both buy and sell prices
Market makers stand ready to buy and sell, ensuring orders can always be filled.
Question 4: Which of the following stocks would typically be the LEAST liquid?
- A thinly traded micro-cap stock (Correct answer)
- A large-cap blue-chip stock
- A major index ETF
- A high-volume tech stock
Correct answer: A thinly traded micro-cap stock
Micro-cap stocks with low trading volume have few buyers and sellers, reducing liquidity.
Question 5: Average daily trading volume is used as a proxy for what?
- A stock's liquidity (Correct answer)
- A stock's dividend safety
- A company's profit margin
- A stock's book value
Correct answer: A stock's liquidity
Higher daily volume generally indicates it is easier to trade the stock without large price moves.
Question 6: During a liquidity crisis, what typically happens to bid-ask spreads?
- They widen (Correct answer)
- They narrow
- They disappear
- They become fixed by law
Correct answer: They widen
Falling liquidity causes spreads to widen as traders demand more compensation for risk.
Question 7: Why do investors often accept a lower price to sell an illiquid stock quickly?
- There are few buyers willing to transact immediately (Correct answer)
- Illiquid stocks always pay higher dividends
- Regulators require a discount
- Illiquid stocks have no bid price
Correct answer: There are few buyers willing to transact immediately
With limited buyers, a seller must lower the price to find an immediate counterparty.
Stock Jobs Stock Market Liquidity 2
A stock that can be bought or sold quickly with minimal price impact is best described as having what characteristic?